“Dear Steve,
Huge amount of credit card debt. One card 40K @ 7.99%, another 7K @ 11.99%, 8.5K @ 3.99%, and 4K @ 21.99%. Plus, 2 car loans total 20K @ 6.99%(these vehicles are used for work/pleasure – 85/15). My income is down from an average of 100K to now about 45K( economic influences beyond my control). We also have rental income on 2 properties ( one has a mortgage of 1100/month) with an income of about 42.5K(as long as they stay rented). Add our primary home mortgage to the mix of 1800/month. We are struggling. All of the payments prevent us from making any headway. We are surviving. No vacations since 2008. :
Recently I received an inheritance of 39K and a IRA inheritance of about 20K.
Should I use all of this money to paydown our debt? I understand the penalties with cashing in the IRA. I believe paying off at least all of our CC debt, that will give us the ability to begain building an emergency fund and allow us to maybe even take a vacation.
I look forward to your advice.
Thank you,
Jason”
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The Answer
Dear Jason,
Hum, an interesting situation for sure.
The thing that makes it a bit of an uncertain puzzle is that there are two equally valid ways to look at this.
On one hand you have the ability to repay the debt and satisfy the debt with the creditors. On the other hand you have a responsibility to prepare for a better financial future to take better care of your future and retirement.
I’m almost never a fan of touching creditor protected funds to repay debt. It can cost you a huge amount in the long run. See Here’s Why a 401(k) Loan to Pay Off Debt Can Cost You a Massive Amount in Retirement.
On top of this we also have the reality that your income has more than halved and there appears to be no expectation that it will return to previous levels any time soon.
[Insert 15 minutes of me staring at the screen and pondering the situation.]
How about this. I’m a huge fan of balance in approaches. Here is seems to make the most sense from my outside and impartial point of view with the information at hand.
- Leave the IRA money alone and protected from the creditors. Leave it in an IRA and let it grow for your future.
- Of the $39,000 in inheritance, take $3,900 and earmark that for a vacation or to have fun with.
- With the remaining inheritance money of $35,100 you could pay off $11,000 of your highest interest rate debt and $24,100 of your 7.99% debt.
- Or you could settle all of your $59,500 worth of credit card debt probably. The debt settlement route would inflict some pain but this way you could probably resolve all of your debt. Debt settlement has some consequences but it is a valid option worth pursuing since you have the cash on hand to settle. You can click here for more information on debt settlement.
The bigger issue here is does eliminating the credit card debt alone make up for the reduction in income and the answer is probably no. With the information you’ve shared I bet this still leaves you struggling.
So let me give you some homework here and ask you to come back with an update in the comments.
Based on your current income, after meeting your basic expenses, how short each month are you? I would imagine that a big part of your unsecured debt is actually the result of putting expenses on cards you can’t afford now. And unless we get you back to a situation where you are living within your income, you will be back in the spot again after spending all the inheritance money. And that’s not where I want to see you wind up.
Please post your responses and follow-up messages to me on this in the comments section below.
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