Question:
Dear Steve,
Im 65yo and wife 64yo. She works about $110,000/yr. We used to bring in income double that. Around $250,0000 in 401Ks. We’ve been carrying debt -credit card over 15yrs making minimum payment-NONE missed, going down super slow now around $84,000 (bad business we gave up and home repairs).
I was forced to retire about 3 yrs ago, on /off jobs for me. Owe about $30,000 student loan private BofA-who won’t negotiate at all (NEVER again!) for son as cosigner who can’t pay as wife has ovarian cancer and 2 boys 10 and under.
Mortgage $3,317/month not inc taxes and insurance. The Heloc is 8% and they (BofA) won’t negotiate with our debt ratio. The first mortgage is at 4%. Not using cards x years. Have a rental home making enough monthly to cover expenses (mortgage, insurance, taxes).
American Direct Financial has offered debt negotiation to $60,000 paid in full in 48 months with a $1,279 monthly payment (currently we pay around $3,000 monthly for credit cards) and having to dip into 401 K to make monthly payments lately as I’m not working with the pandemic.
Their take will be about $16,000. Always thought a negotiation of 25-50% of debt was better. There’s other DMPs locally.
Loans also available against our 401Ks up to $50,000 each for 5 years at low 4 % interest rate. Thinking of doing that for our second on our home ($113,000) which would bring payment to $1,700 a month once pay off Heloc.
If Bankruptcy, would they make us sell our rental?
Feel stuck in quicksand, thanks, Al
Answer:
Dear Al,
Thank you for sending in your question.
You have some competing issues:
1. Declining income.
2. Heading rapidly towards “retirement” and potentially lower income.
3. Limited 401(k) balances.
4. Unmanageable debt that is causing you to dip into precious retirement/savings.
For me, these situations are primarily math problems. If you take the emotion out of it and just look at the facts, the answer or options can be clearer.
In your situation, there is not a single definitive answer. But given the facts and reality, with a lot of research and homework, I think you can make a good choice for you.
It sounds like you contacted American Direct Financial, which promotes unsecured loans and wound up being pitched some sort of debt settlement solution. This is interesting because it does not appear to be the primary product they sell. If it’s not, I wonder how good they are at it.
Keep in mind when you contact nearly every debt relief outfit they are trying to sell you their product. They are not trying to provide you with independent financial advice.
Is the solution pitched to you a good idea? Well, let’s look at the facts as you shared them.
You were told the plan would take four-years and that will put you at age 69. Closer to retirement and still not saving much and if your income continues to drop there is no expectation you will be able to complete the plan.
The product will cost you $16,000 and again, take a projected four-years. Compare that with a Chapter 7 consumer bankruptcy that costs $2,000 and takes about 90 days to eliminate your debt. Of course, in your situation, a Chapter 7 bankruptcy might not be available to you.
So from a math point of view, the most logical thing to do would be to reduce expenses, focus on building up your retirement savings rather than draining it and preparing for a future where you have less income.
The idea that a 401(k) loan is a cheap interest rate is misleading. What it does not take into account is the loss of the rise in value during the time the loan is outstanding. For example, the stock market is almost sure to rise from the current levels. That’s what history teaches us.
So if your money is out of the market at a low price point you will miss out on the increase in the value of the market. Let’s say the stock market goes up 10 percent. That means your loan will actually cost the nominal interest rate of 4 percent plus the lost increase of 10 percent. This results in a 14 percent loan. Not awesome.
Ovarian cancer sucks. I should know. My mother dealt with it. Your medical struggles in your family may become more severe physically and financially in the months ahead. That can also hinder your ability to make it through a debt settlement solution. And let’s not forget, that payment you were given is not binding on your creditors. Once you default on the debt in the settlement solution you may find yourself in collections, facing lawsuits, being sued, and owing taxes on the forgiven amount. This is on top of trying to assist your son, take care of the grandkids, and deal with a declining income.
If you could make ends meet and still save on your current income, then dealing with the rental is less of an issue. But just imagine trying to deal with repairs or unexpected expenses when you aren’t able to make ends meet?
From experience, I think the solution to your situation is going to be multifaceted. It will require some adjustments here and there and some advance planning and a strategy to actually deal with the debt and overall commitments.
I don’t believe there is a “one-sized hammer” product that is going to be perfect for your unique situation.
The best solution for you is going to be created by either talking to a number of different debt solution providers like a few bankruptcy attorneys, credit counseling groups, and debt settlement companies. Only by talking to a number of different solution providers and letting what they say percolate for a week or so will you be better informed. But then again, you are the least experienced person to deal with this stressful and unique situation.
Alternatively, you could talk to an independent debt coach like my friend Damon Day who can help guide you through this dark path using his many years of experience in similar situations.
I can give you advice but what you need most of now is a guide to lead you down the path to a better future.
But that’s just my opinion.
Please let me know what you decide to do by updating me in the comments below.
You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.
Do you have a question you'd like to ask me for free? Go ahead and click here.
Asked question about American Direct Financial.
Answered.