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I Emptied Out My 401(k) to Make Credit Card Payments But I’m Still in Trouble. – Beth

“Dear Steve,

HELP! Over the last 6 years I have been accuring debt often times, making just above minimum payments on my credit cards. I obtained more credit in order to make balance transfer, pay for graduate course work and of course irresponsible spending.

Now I have maxed out six credit cards totaling in almost $44,000. I emptied my 401K in order to make payments. Worst of all I have stopped making payments. Two credit cards almost two years ago and the outer four I have stopped making payments on in the last 9-12 months. I also have a student loan which I have continued to pay with $847.00 remaining.

While I have made lifestyle cuts in the last 5 months, my rent and utilities are still $800 a month, $227 car lease pm, $150 car insurance pm with $1780 in savings. As a teacher I make about $33,000 in take home pay a year and have about $1,000 extra income from a second job a year.

I am beyond frustrated with myself for making so many poor financial decisions and put them off for fear. But now that I realize that this won’t go away and I’m not winning the lottery, I don’t know where to turn. What should I do to get my debt under control??

I contacted a CCCS credit counselor in hopes of getting some counseling and even perhaps setting up a debt management program. They advised me to contact my creditors first to see if they would participate. When I contacted Bank of America said 2 of my accounts were still there but had gone to the legal department. They also said they don’t deal with third parties. What does this mean? Instead they tried to make a settlement offer (using a 401K) or a 24 month repayment program.

I have received several letters from law firms that note it is an attempt to collect debt and that a lawsuit is pending (and one that according to the firm has been filed). What does this mean? Has a lawsuit really been filed? How can I avoid being sued?

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While I have a huge amount of debt, I have a stable job and have created a budget. I can manage to save about $1,015.00 a month. At this rate I could pay off all my debts in 4 years. I really do not want to file for bankruptcy or make settlements. As I understand, they both have a large negative impact on your credit for years.

Thus, I am hoping to consider enrolling in a debt management program. However, I also hear conflicting information. What is the chance my creditors will agree to participate, especially if my debt is with a debt collector? Should I call the debt collectors to find out? If so, what do I ask? Is bankruptcy perhaps my best option?

Beth”

Dear Beth,

Beth, Beth, Beth. I wish you had found me way earlier before the 401(k) money got tossed away. When I hear stories like this it makes me cringe. But let’s pickup the pieces and move forward. No sense wasting a perfectly good mistake I always say. Let’s learn from it.

It sounds to me that the CCCS company you spoke to might not have been a mainstream company. I would love to know who they are. They sound more like a debt settlement company, especially since they sent you back to Bank of America and B of A said they don’t work with companies like that.

I’m conflicted about what path is best for you at this point. We are kind of at a fork in the road that could go either direction. As far as negative credit goes, since the accounts have already charged off and in collections the damage is done and that will stay on your credit for 7.5 years. So what is the best way to take care of the situation?

A Chapter 13 bankruptcy is a legitimate solution. Under a Chapter 13 bankruptcy you would get protection against any collection activity and lawsuits which would ease your mind. The interest rate on these debts would go to 0% as well. And that protection is pretty substantial. It might also give you an opportunity to save some money each month to build up an emergency fund. And don’t worry the credit can easily be rebuilt.

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One the other hand, if you can get connected with a more mainstream credit counseling group like Money Management International or Cambridge Credit Counseling and get a second opinion about a DMP then it would give you some better information to make a decision from.

So here is where I think I am. I think you should click here to find a local bankruptcy attorney and get a free review of your situation and also contact one of those more mainstream credit counseling groups I mentioned for a second opinion.

Once you do that then come back and update me. Let me know what you think. Does that sound like a reasonable and logical approach to you?

Sincerly,
Steve

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.




About the author

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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