Tag Archives: credit card debt

Do you have $50,000 to throw away?

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Well, do you? You may have already thrown it away, without even thinking of it that way. The money I’m referring to here would be what you have (or had) socked away in your IRA or 401(k) account. You might be thinking about cashing out that account in order to pay your credit card bills because you are falling behind and your minimum payments just went up, or you lost your job, or you just took a pay cut at work, or for whatever reason I haven’t mentioned here.

I know, you may not have as much as $50,000 in an IRA or a 401(k). It might be only $1200. Maybe it’s a lot more than $50,000. Or you might not even have a 401(k) or IRA account – but this post is targeted to those who do.

If you have fallen behind, or are about to fall behind, on your credit card payments and you are considering taking money from your IRA or 401(k) account to catch up those payments and to avoid bankruptcy, please reconsider. Before you touch any of that money, sit down and work out the numbers, without taking into consideration future job prospects or future money that *might* come your way at some point. Only use current income numbers – will cashing out your 401(k) or IRA savings really be a good thing? Don’t forget to add in the taxes, penalties, and/or interest that you will owe on the distribution from the 401(k) or IRA, plus the fact that if it’s a 401(k) loan, add in the money that you will owe yourself on that loan. And add in how much it will cost you to save up that much money all over again.

If you’ve worked out the numbers, did you notice how expensive it gets to take money out of these types of accounts and to use the money to pay down on your credit card debt? And how the amount probably doesn’t even cover all of your credit card debt? If the latter is the case, then I ask you: Why are you even thinking about it at all?

Regardless of whether you can pay off all of your credit card debt by cashing out a 401(k) or IRA, you would be doing yourself a disservice if you did not consider bankruptcy as an alternative. And I mean *alternative* – what I am trying to prevent by writing this post is a situation in which you cash out the 401(k) or IRA, throw the money at your credit cards, and then file for bankruptcy anyway. Because that will have been a terrible waste, and I’ll tell you why:

In Chapter 7 bankruptcies in New Jersey, most IRA and 401(k) accounts are safe from being taken and used to satisfy your debts.

That’s it, really. So if you are about to cash in that 401(k) or IRA account to pay on your credit cards, please think again and consider the huge costs you will be facing by doing so.

Photo by gmdesign1.

Debt settlement isn’t usually the best option

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Looking at debt settlement to help rid yourself of credit card debt?

Credit cards are a huge problem in the U.S. A May 21st New York Times article reported that the Standard & Poor’s/Experian Consumer Credit Default Indices shows that the default rate on credit card loans recently climbed to its highest point, 9.14 percent, since the index first began in 2004.

So more people are no longer paying their credit card bills. What are those people who’ve stopped paying on their credit cards doing about their credit card debt?

Hopefully, they’re not paying a debt settlement company to try and “get out of debt.” There are a few cases where using a debt settlement company may be appropriate, but not many. Many debt settlement companies take large fees and tell you to stop paying on your credit card bills. They take monthly payments from you for a long time. Then they make offers to your credit card companies to settle your debts.

Sound like something you can do by yourself without paying the high fees? Yeah, there’s a reason for that – it is.

But many people who are taking the debt settlement route should consider bankruptcy instead. If you’re thinking about pursuing the debt settlement route, ask yourself, “why did I decide that bankruptcy wasn’t for me?” Was it fear? A belief that bankruptcy is too difficult?

You owe it to yourself – and your financial health – to first take the time to do some research. Look around online. The bankruptcy courts have their own websites with plenty of information for potential filers. It can’t hurt you to take the time to educate yourself. You need to know what the potential benefits of bankruptcy are before you commit to the high fees charged by a debt settlement company.

Photo by Alan Cleaver.

3 mistakes to avoid when paying credit card debt

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You will see all sorts of advice about “managing debt.” But when it comes to credit card debt, mere “management” can get you into trouble.

Truth is, the best way to “manage” credit cards is not to carry a balance at all. Don’t spend more than you can afford. Pay off the entire balance at the end of every month.

But you will find advice out there about how to pay down credit-card balances and keep ahead of the game, as though everyone were in an equal starting position in a game of Monopoly. Some of this advice may be right for you if you can afford it and if it will successfully lead you to a goal of getting all your credit card debt paid off.

Unfortunately, people often don’t realize, until they’ve made even worse financial mistakes, that the advice they tried to follow to pay down on their credit-card debt or to pay it off just wasn’t right for them.

If you are in a position where you are thinking about getting money from somewhere other than your regular source of income just to pay off your credit card debt or to pay it down “just enough,” you are thinking along the wrong lines.

Here are my personal “do not” rules for paying down credit card debt:

* Do not borrow money to pay off credit cards. “Borrowing money” includes things you might not normally think of as borrowing, like using your checking account’s line of credit or overdraft protection.

* Do not take money out of a retirement account to pay off credit cards. Especially do not cash out, or withdraw any money from, a 401k account – you will not only be cashing out part of your future safety net, but you will also be incurring a huge tax liability in the process. A tax liability that – by the way – is likely not dischargeable in bankruptcy.

* Do not spend money on a debt consolidation company (or a debt whatever company) to pay off credit cards. You would be spending extra money to just to repay money. Some people do this successfully, but the people who manage to pull this off already have sufficient income to pay off their debts eventually. And those people could probably pay off their debt without a debt consolidation company by reducing their expenses and making large enough payments toward their debt to pay it all off – and they can also call up the credit card companies themselves to try and negotiate better payment arrangements.

If you’ve looked at your income and found that you “have to” do one of these three things in order to pay off (or even to pay down) your credit cards over time, stop and consult a bankruptcy attorney. Do not dig yourself into a bigger financial mess by making one of these three mistakes.

Don’t make even bigger financial mistakes! If you are drowning in credit-card debt and can’t dig your way out, call me for a free bankruptcy telephone consultation at 201-676-0722.

Photo by MENE TEKEL.