“Dear Steve,
20 years same company making 200 or more each year in a sales role. Got fired unexpectedly. Been riding large debt load for years, but managing it I guess because of big income. My monthly nut is about 4k. + another 3k to float my excessive bad debt:
Two cc: 32k 0% 12 months coming due in jan min 500/mth
16k line credit from bank @ 7%
25k loan from a family member paying 470/mth @4%
Car payment 612 owe 22 car is worth that or less now I was getting 700/ car allowance
Mortgage is 1734@ 5.7 30 year (10 years) – owe 175 house might sell for 270-300
Second is 763/ mth @ 7% owe 62
Mth.
Car insurance 180
DTV. 90
Golf club dues. 350
Mortgage. 1763
2nd. 762
Cell. 120
Groceries. 700 (includes house stuff personal items)
Consumers. 250
On my last day I did collect a net bonus of 42 vacation pay 15 days and a few more weeks of pay
I payed off my line of credit and another 8k in revolving debt, and have been paying all my payments with it.
Down to 9k and need to make a move
If I cash out my 401k of 200 I can pay all debts including car 18+14 cc’s , 22 for car loan and 21 for family loan that’s 75 in total of 133 total I could get. At that point I would need only about 4k/mth. I am drawing 1200 mth from UIA. I have started my own consulting business and have about 5-6k booked starting in jan. I am also looking at other jobs in corporate America which would quickly jump me back to the 200 plus category although my dream is to be my own boss.
I know very well that taking this 401k money is stupid, but so is my debt.
I feel like this is my only way out.
Tom”
Dear Tom,
I’m not sure what I could say if emotionally you’ve already made up your mind and see this as a “good” way out. But if you want to look at this situation logically then we need to evaluate the true loss on your retirement funds when you drain the account and take the tax penalty. It’s massive.
Do what you want, but essentially what you are doing is robbing from your future to deal with an issue today. It’s a classic example of hyperbolic discounting where the immediate stimulus feels more important than a more important longer term goal.
Since I’m speaking bluntly, I would advise you to not pay any more debt until you have done some homework about how to deal with the problem debt. You’ve already spent down precious cash on hand towards paying off debt. That might just be a huge mistake.
You might be saying you’ll land right back on your feet and be back in the $200,000 income range very shortly, and you might. But what if you’re not. What if your story turns into the refrain I hear often of the job conversion that does not go as planned or that takes longer and longer to replace. What’s the plan then once you’ve drained the 401k, paid off the debt and run it back up again?
Tom, you ran up this debt while you were already making $200,000 or more each year. You are currently making $0 and the odds are heavily tilting towards you running up more debt again unless you either replace your missing income tomorrow or you drastically cut your expenses.
Let’s just look at the $350 a month for golf club dues. I doubt that even includes the cost of gold outings with all that comes with it. This and other expenses are currently being funded out of non-replaceable money. This accelerates your potential downward spiral because IF the future income does not come in you are spending down the little cash you have on hand, and can’t replace, to help you get through.
Congratulations on launching a new future consulting business with booked income in January. But if that’s all you book, you are screwed. January is three months away. With the loss of your job you need to replace $16,666 a month. Not only is the $5,000 gig not enough but between now and January you will have lost $50,000 in income you would have made.
And being self-employed can be a wonderful experience but your $16,666 monthly goal isn’t enough to replace your lost income. No, you’ll need to factor in the additional cost of self-employment taxes, your own benefits, retirement deposits, health insurance, and much more, like the car that’s no longer covered. You’re goal to get back to when you were is going to have to be in the $21,000 a month range to get back to $200,000.
It’s one thing to consider making a withdrawal from a retirement plan in the face of income coming in and what feels like a secure financial future. It’s quite another to drain the very money you may depend on when you can’t earn in HOPE that it will solve your problem today. And that 401(k) money is protected from creditors if this all hits the fan.
I’d suggest you first read How to Get Out of Debt. The Honest and Unvarnished Truth and The Truth About The Success Rates, Failure Rates and Completion Rates of Credit Counseling, Debt Settlement, and Bankruptcy. They will give you a great overview of what we need to deal with to get you moving in the right direction.
Then use the free How to Get Out of Debt Calculator to review your options.
Once you’ve identified a company you want to work with, then follow my step-by-step guide on how to check out a debt relief company.
Please post your responses and follow-up messages to me on this in the comments section below.
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