Quick Answer: Bankruptcy should be avoided when income is sufficient to manage debt, as demonstrated by a 27-year-old with $25,000 credit card debt earning $55,000 annually with a pending $10,000 raise. Financial experts recommend against borrowing from 401K retirement funds for debt repayment, favoring balanced debt reduction strategies over quick fixes.
“Dear Steve,
I have unsecured credit card debt for around $25,000. I am 27 and make around $55,000, but will be getting a $10,000 raise in the next. My financial situation at work will be improving further from there, I am just not sure if it will be 6 months or a year. I currently rent for housing, but will own my car in August, which will add additional money to my monthly payments. My current credit score is 603, which I know is not good but it is a result of the unsecured debt. I have spoken with a bankruptcy attorney, but I would really like to avoid that at all costs.
Since I want to avoid bankruptcy and other debt consolidation and programs that will harm my credit further, what method would be best for me to get out of this hole? I have seriously considered drawing against my 401K to reduce my debt as much as possible to improve my situation. I know this will end up costing me in the long run for my retirement, but I would really like to have the peace of mind now and get this all paid off as soon as possible. Please advise if you think that is a good idea or what would be a better approach.
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Dear Sean,
First off, it sounds like you are doing a bunch of things right. Kudos to you.
Getting out of debt should not be a sprint, but a balanced approach.
The drive to want to borrow from the retirement funds feels as if you want the debt gone quickly and that’s a way to get to some money to do it.
I never like to see people touch retirement funds in situations like this. Those funds are easy to borrow but very hard to restore to put yourself back in the same financial position. Just think if you had done this even 18 months ago, you would have lost out of the massive increase in stock values in that time. Yo’d probably have to add gobs of additional cash into your investments to get back to the current balances you would have missed out on.
I think the smarter approach is to use a measured approach like that offered by ReadyForZero.com. The organization and online plan will give you a framework to follow to pay off your debt using the money you have on hand.
Once your credit gets better you could consider an unsecured debt consolidation loan from LendingClub.com or Prosper.com and pay off that remaining credit card debt without sacrificing your retirement.
The goal at this point should be to reduce your debt, save money every month, and have some fun with the rest of your cash. Life is meant to be lived and enjoyed, even when you are getting out of debt.
Please post your responses and follow-up messages to me on this in the comments section below.
Before You Sign Anything: Run any debt relief contract through the free Contract Decoder to spot hidden fees and unfair terms. Check the company’s complaint history with the Scam-O-Meter.
Compare Your Real Options: Most debt relief companies won’t tell you about all your options — especially the ones they can’t profit from. Credit counseling has a 21-27% completion rate. Settlement resolves about 1% of enrolled debts fully. Bankruptcy has a 95% discharge rate — and protects your retirement. Take the Find Your Path quiz for a recommendation based on your actual numbers.
I thought that bill consolidation also cost a lot, due to the interest they add.
Generally the least expensive and most effective debt intervention is a chapter 7 consumer bankruptcy.