Yvonne

“Dear Steve,

We own a house which we want to sell and move elsewhere. We have probably $120,000 equity in the house. We owe one year’s lease payments on a work van at $700/mo. and then owing $18,000 at end of term. We owe $40,000 in credit card debt. I keep switching cards to save on interest.

My husband is a floor layer and the paychecks are not regular. I am a stay at home mom with two small boys. Last year he grossed about $55,000.00. We’re barely keeping up and rely on credit cards when there’s no pay to cover necessities. It’s getting worse with the recession.

Should we sell the house and pay off all debt or use that money to buy another house? I am thinking that if we pay off all of our debt we won’t have enough money to buy another house, or at least a house that isn’t a dump. I don’t want a big mortgage and I don’t believe we’d be approved for one anyway. I estimate that where we are moving a decent modest house will be about $225,000. Our mortgage now is about $90,000.00.

So should we pay off debt and end up renting or having a bigger mortgage? Or should we put all of our money in another house and pay off the credit cards the long stressful way as we have been doing?

Yvonne”

The Answer:

Dear Yvonne,

My answer might surprise you. I think if you can sell the house and pay off your debt then you might be in a better position. Here is why.

Your husband needs the work van for the type of work he does. You’ve got a big bill coming due on that van at the end of the lease payments and you’ve only got a year left. If you can’t find $18,000 by then he could be without a work vehicle. Sure, he could always gamble on finding another one but he’s got one now.

The card switching game is dangerous. Any one of those credit card companies could raise your interest rate at any time or refuse you yet another balance transfer and you would be in big trouble. With the rate increases that creditors are pulling now, it is not unrealistic that those rates, and payments will go way up.

If you find yourself stuck on the cards and the van then you might be looking at bankruptcy and if that is the case you’d be in trouble.

If you can sell the house now, save money for taxes, the van and pay off the credit cards and you can put the rest in a savings account to protect it and use for emergencies instead of turning back to the credit cards.

Until the housing market begins to improve I think you should consider renting.

Now, when the economy improves your husband should be getting more work, his income should increase, you can use the cash in your savings account for a down payment, he’ll still have the van to earn a living and you won’t have any credit card debt. best yet, if you follow this plan you’ll have a spectacular credit score and credit report. You will have avoided any delinquencies on your credit report, no bankruptcy, no foreclosure and no repossession.

The only bad thing in this approach is you are going to have to mentally get over the thought of renting versus owning.

Big Hug!

@GetOutOfDebtGuy

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Read the full article at GetOutOfDebt.org, click here: Should We Sell The House And Pay Off the Credit Cards? – Yvonne

Tanisha

“Dear Steve,

I recently recieved $137k into a 401k account from my ex-husband due to a divorce. I’m 35 years old, 2 kids, unemployed stay at home mother for past 8 years. I will receive spousal support until 2012. I no longer own any property or assets and I have $33,000 in credit card debts with interest rates ranging from 10%-18%.

With the stock market the way that is, I feel the need to cash out a portion of my 401k to pay off all debts. I understand that there’s a 20% tax penalty for cashing out and the 10% for early withdrawal is waived due to divorce.

Do you think that I’m making the right decision to cash out the 401k to get rid of the $33k in debts? The monthly credit card payments total approximately $750-$800 per month. If an emergency happens, I feel afraid that I don’t have extra cash around every month due to high credit card bills.

Should I cash out the 401k to get rid of the debts?

Tanisha”

The Answer:

Dear Tanisha,

Normally I am dead set opposed to using retirement money to pay off debts. But in your case, i may be willing to make an exception to that position.

Your situation is a little bit unusual in that you are an unemployed mother. It appears you have no money coming in except for spousal support and then this $137,000 401(k) windfall.

Normally I would suggest not touching the 401k money since it is there for your retirement and will grow to provide savings for you in the future. However, as an unemployed stay-at-home mom there is little chance of you repaying the $33,000 worth of credit card debt without finding a job and going back to work.

By paying off your $800 worth of credit card payments each month it will make it easier to get by on what little income you do have coming in, especially since that money will only continue for four more years.

The best case scenario is that you are able to find gainful full time employment and repay your credit card debt that way. Then you will be able to leave the entire $137,000 in the 401(k) and since the stock market is currently at very low levels, by the time you retire that investment will be worth a lot of money.

Outside of that you could consider bankruptcy, go bankrupt, discharge your credit card debt and leave the entire $137,000 in your retirement account. That would get rid of your debt and protect your 401(k) funds.

I think before you decide what to do you should discuss your options with a bankruptcy attorney. You can ask for a free bankruptcy review and use the session to become better informed about what your options are under bankruptcy to eliminate debt you cannot afford and protect money that is designed to take care of you when you get older. After talking to the bankruptcy lawyer you will truly be able to decide which path is best for you.

Big Hug!

@GetOutOfDebtGuy

The Answer:

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Read the full article at GetOutOfDebt.org, click here: Tanisha Wants to Cash Out 401K To Get Rid Of Debts.