Brandy wrote to me through the GetOutOfDebt.org site and asked the following question. 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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“Dear Steve,
I am 30 and my husband is 40.We have 27,000 in his 401k (we have lost almost 10,000). We dont have much as far as credit cards but we are drowing in a house payment, 2 Vehicle payments (1300 per month) and a payment on a rental property that we are unable to rent out. We owe 26,000on on car 50,000 on the other and about 48,000 on the rental. we have no equity in the house we live in. We make about 100,000 per yr.
Would it be wise to pull the cash out of the 401k and pay towards the 26,000 vehicle loan..since we are loosing to the stock market anyway?
Brandy”
The Answer:
Dear Brandy,
I never like to see people pulling money from a 401k that is protected from creditors to use to repay part of a debt, or almost any debt.
In your case, you are proposing to drain your retirement account, pay a penalty and take a tax hit to pay off only one of the anchors around your neck. I’m afraid that unless you have a plan on how to resolve your entire situation that you are simply throwing your money away.
Leave the money in the 401k. It might be losing money now but by the time you get ready to retire it could be worth $100,000. And if you take the money out now and throw it down the drain it will definately be worth $0.
You make a great income but $100,000 sure doesn’t go as far as it used to. I don’t think it sounds like it is enough to sustain your current obligations.
A simple approach like a debt management plan isn’t going to be effective in resolving this situation. But the good news is that you do have a couple of options.
- You could contact the lenders of the vacation property and your current mortgage and talk about what modifications might be available for you on those loans.
- You could refinance your mortgages to lower your interest rates and subsequently lower your payments.
- You could talk to an auto lender, your bank or credit union about refinancing the car loans to lower them.
- As an absolute last resort you could speak to a bankruptcy attorney about reorganizing your debt in bankruptcy. It is the absolute last resort for you but it is an option.
- Whatever you do, don’t take out that 401k money.
