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We Are Current on Our Bills But Not Getting Anywhere. We Need a Get Out of Debt Plan. – Steven

“Dear Steve,

I have a good job, a large family, and a lot of debt. We were debt free except for a house note at one time, but reached a point where both vehicles needed to be replaced. Frustrated with our used vehicles and repair bills, we bought new vehicles, and have around 45k in vehicle debt.

We have three children, and our oldest daughter is in jr. high school. We have around 17,000 in unsecured debt for school expenses. We have around 10,000 in debt with a credit card. We are incurring additional debt for additional higher education. We have medical bills, as life seems to accumulate them in a family of five. We have only around 20,000 in home equity, and can’t seem to find a scale down house that won’t cost a considerable amount for us to move, considering the cost of a move would be approximately 10000 dollars, leaving us with only 10,000 for debt retirement.

We have inquired about a refinance of our current home to get some extra money for paying off bills, but at 6.1% interest rate, the difference in the payment is not sizable enough to warrant the expense in closing costs and additional appraisals. A home equity loan is not feasible either.

We have around 17,000 in an IRA, and are highly tempted to cash it in, so that the 17,000 unsecured school debt can be paid. This was on a 0 percent credit card, but now there are no balance transfers available for zero percent, and the current interest rate is fixed at 7 percent on that card.

I have been pondering what to do about this situation. We are making payments on all debts, but can’t seem to sustain a “snowball” payment. We make good money, but are experiencing stress that we have so much debt, and can’t put aside money for higher education costs for our children. Our home was purchased at 30k lower that market value, yet needed to be remodeled, and we put 20k into it. It is a nice home, large enough for a large family. Considering a move has shown us that moves are very expensive, and we are concerned that we won’t find as good of a home investment as what we are now in.

What can be done in this situation? Would you advise a “scale down” move, liquidating our current home, renting or buying a smaller property, or renting for a two year period in order to retire these debts? Both mom and dad are pursuing higher education degrees, yet we want our children to be prepared for as well. Higher education costs considerable dollars today, yet not pursuing higher education seems to be counterproductive to holding good paying positions.

Should I consider liquidating the retirement account in order to pay off the 17k and give myself a “snowball” capability for the other debts? I feel like I am drowning in debt, even though I am making my payments on time, and have funds to make the payments. I have an overwhelming urge to become completely debt free, but can’t see a ready made attack plan.

We are not interested in consumer credit usage denting our credit scores. We are not interested in a two income household since we have a one year old child in the home, and certainly not interested in bankruptcy. We do need very good, solid financial advice at this juncture, to reach future goals. We need an external perspective.

Please advise.

Steven”

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The Answer

 

Dear Steven,

It does seem you are trapped in the creditor “sweet spot”. That’s the point where you are making all the payments but don’t make enough to get out of debt. This is where creditors make the most money off people. It’s where they want you.

Ultimately the answer here is going to lie in some sort of intervention. Let’s say we are standing behind a dam that has water slowly pouring over it. To stop that situation we can either restrict water flow to the dam, do something to adjust the dam height, or do some combination of both.

It is the same issue here with your situation. We either need to increase income, reduce expenses or a little of both to get a change in the situation.

I’m glad you brought up the renting option. I’m a fan of renting. People just never appreciate how expensive a house can be. It’s not the mortgage that kills you, it’s all the other expenses that go along with being responsible for a home.

Depending on the difference you can achieve by scaling back to a rental, that might just be enough to do the trick and give you the extra funds you can use in a debt snowball to start eliminating your debt.

I am not a fan of liquidating the 401(k) for quick cash. It is a reactionary move that robs you of retirement funds you need to let grow. Why give away a sizable portion of those funds to taxes and penalties. If you take them out you will never get back in the same position to earn as if you just left them alone. Besides, if things go down the toilet, the funds are protected from your creditors as long as they stay in the 401(k) account.

Even if you did slaughter the 401(k) and take the funds out I really don’t see that being a long term solution. Unless you can make a big enough difference in your monthly spending plan the need to accumulate the debt again will occur. This time without any funds in the 401(k) to tap.

An excellent place to turn for a debt consolidation loan is LendingClub.com. LendingClub is a peer-to-peer lending network that cuts out the bank. Depending on your credit score the rates can be pretty good. You could consider rolling either some of the debt into a LendingClub.com loan or refinancing a car to extend it out and reduce your payments. Between that and renting you should be fine over the long run.

So what do you think? Does that seem to be a sensible and reasonable approach?

Please update me on your progress by posting updates here in the comments section of your question. I’m very interested in how this works out for you.

Big Hug!

We Are Current on Our Bills But Not Getting Anywhere. We Need a Get Out of Debt Plan.   Steven
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P.S. Be sure to read ‘The Secret of Surviving Through Difficult Economic Times. What I Learned On My Journey‘.

If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.

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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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