Debt vs. 401k vs. Cash flow

[riverwed070707]

Why do you have 3 years left to pay for on 05 car? How long did you finance it for and how much are you upside down? Theres a big difference between losing $1k and losing $7k, and it may very well be a good option to reduce your monthly expenses.

We had to go through a downsizing period a couple years back. DH traded his 05 for an 01 and we haven't had a single issue with it. A 10yo car is not junk, especially if it comes without (or with a lower) payment. You'll have extra cash flow to help pay down your debt and if something does come up with the car, its still going to be less to fix than you've been dumping into payments on a car you can't afford.

You sound like you know there is a problem and you want to fix it but you don't want to make the hard choices that need to be made in order to do so. Getting out of debt takes time, it takes sacrifices and it's hard work. Bankruptcy and wiping out your retirement are quick fixes but the long term effects aren't worth it. Despite how it feels, you aren't that far in the hole. You can get out of this.

Anything you can do to boost your income? Can one of you pick up a second job? How old are the two of you -- mostly wondering how many years til retirement?

[snafu]

Without figures for net income and out-go, it's impossible to offer anything but vague suggestions. On the expense side... 1st call the creditors and tell them you want to work with them rather than bankruptcy. You may get 'no' but keep asking for supervisors until you get someone helpful. It damages your credit but you can negotiate a lower interest rate. 2nd, contact your state/government 'Orderly Payment of Debt' agency. Take great care as some agencies are for profit and not at all helpful to folks they can take advantage of. Eliminate every unnecessary expense like cable, internet can be accessed from the library or WIFI locations, eliminate all away from home eats/drinks, bring the food budget to frugal, limit gas/auto expense to work/return with errands enroute only. If you have both land and cell phones, cancel your land phone, do whatever is necessary to reduce utilities.

On the income side, what can you and wife do to increase income? List your skill sets and how they can be used in your neighborhood, odd jobs, PT work, rent a room, babysit, yard care, dog walking, houseworking ladies here earn $ 65. for 2 hrs. light work.

Take heart, this is short term pain for long term gain. When the economy hits the skids we all need to change habits to fit circumstances.

[cypher1]

Originally Posted by PEAMAX

I don't believe the way out is to sell the cars. Move on and come up with a better idea.

Either spend less to lower expenses, or increase monthly income to sustain current lifestyle. Either way it comes down to priorities in one's life. Just another note, there's nothing wrong with downgrading cars in order to get out of car payments. Depending on the make/model, a 10yr old car isn't a POS, especially for Honda.

[MSDEE72]

Originally Posted by PEAMAX

Here is our dilemma:
Due to a job layoff and a new job that pays half as much, we are finding ourselves falling farther behind in debt and we have not been able to contribute to our 401k for over two years. Our cash flow will soon go negative if we don’t make some major changes. We already have stopped using the credit cards and only pay cash for the routine expenses, so the card debt is not increasing but the $500 minimum payment is draining us. We have two car payments and two other financed items along with the total card brings our debt to $50k, not including the house mortgage. We have approximately $110k in the 401k and as I said, it has not been contributed to for several years.
Here is what we are thinking:
Take the money out of the 401k and payoff the $50k long term debt. This will rectify the negative cash flow. This will then allow us to now contribute back to the 401k at a rate greater than ever. If we don’t stop the debt and get into a positive cash flow situation, the 401k funds really are doing nothing for us. If we wait to use the 401k at retirement we will be so far in debt that the debt will be more than the 401k amount. I realize this is a drastic action and goes against the basic idea of a 401k, but what else is there? We have to stop the bleeding.

Your feedback is appreciated.

Hi, my comments are strictly my opinion based on the reality of your situation. Just get out pencil, paper and calculator. First figure out how much interest you will have to pay in order to pay of the 50K and how many years it will take. I believe the answer will be that if you do not pay this off via your 401K, you will not only never pay it off, you will end up having to use your 401K for cash and you will still owe this debt because you are just paying interest and very little principal. Although you will have to pay taxes on the 401k which is why I always say pay now via a Roth IRA, so you won;t have to pay later at a higher tax bracket. All of that to say....once you figure out the interest you would pay and the years it would take to pay it vs the tax you will pay to take out the money, you may elect to do it over the course of two years. Now get ready for this suggestion. Google the Bankruptcy Laws. Hold on now) Add up all you expenses per the Bankruptcy Laws. Then add up all your income. (Note: I think your 401K fund is excluded in your assets...check this out) If you debt is greater than your income/worth...I would consider filing Chapter 7 Bankruptcy. What??? Yep...you need to look into this. Don't believe the lie and hype that this is a sin and a shame. It is more a blessing than a sin. Bankruptcy was originally allowed only for the "haves", not the have nots.
Trust me, before your bankruptcy is even completed you will receive all kinds of solicitation in the mail for cars, credit cards etc. The rich file bankruptcy so many times it is ridiculous, but they have people like you and I believe that is is morally and personally a failure. You are doing the best you can....you need to really look into this.....get a Lawyer for a free estimate.....go for the throat and file Chapter 13. If however you have equity in your home, you may have to sell your house to settle up with your creditors or pay a settlement amount in order to keep your house. Get advice, but PLEASE...stop paying out all this interest. It is negating what you have already saved up. Again, this is my own opinion. Bankruptcy was instituted by the rich to give themselves a way out of failure and was based on the Bible that says a slave should only be held for debt for no longer than 7 years, hence the 7 year rule that you cannot file for total debt cancellation but every 7 years. It was never intended for the poor because they never intended to allow the poor to have credit or own anything. Hope this helps you.

[autoxer]

Originally Posted by PEAMAX

We can't sell the other two items we owe on, they are fixed property.

What does that mean? Home renovation? Can you sell the house?

Raiding the retirement account may seem like an easy fix, but for your long term finances it is a terrible idea. You need to change the way you look at money now, so you don't have extreme money problems in retirement. Although you could easily wipe out the debt with retirement money, that won't do anything to change your habits and you will likely end up in more debt problems down the road.

[disneysteve]

Originally Posted by MSDEE72

I believe the answer will be that if you do not pay this off via your 401K, you will not only never pay it off

How did you possibly come to that conclusion without knowing anything at all about this person? You don't even know how much he earns.

[Redraidernurse]

Never heard back with a budget listed? Decision made?

[jpg7n16]

Originally Posted by PEAMAX

If my mind was made up why would I be meeting with a bankruptsey lawyer after taking the advice given here?

BTW, the 2005 Honda was purchanced used and the truck was bought new for $14K and I need it for work. I work nights, my wife works days so we can't share a car.. We're not driving BMW's and Hummers here. Our payments are $200 and $257/mon. Selling them at a lost and buying a car with a $150 payment is not making a dent in the problem.

I don't believe the way out is to sell the cars. Move on and come up with a better idea.

Did the bankruptcy attorney tell you that if you file, you'll likely have to sell the cars as part of the agreement? (Can I keep my car if I file Chapter 7 bankruptcy?)

So one way or another, the cars will likely go.

And since you will have just filed bankruptcy, and had no equity in the cars - good luck getting financed on buying a replacement car.

----------------------------------------------------------------

Originally Posted by PEAMAX

Here is what we are thinking:
Take the money out of the 401k and payoff the $50k long term debt. This will rectify the negative cash flow. This will then allow us to now contribute back to the 401k at a rate greater than ever.

I also just disagree with the premise that you'd magically start contributing more than ever to your 401k if you paid off your CCs (per OP#1). If you have enough to contribute, you have enough to pay extra on your CCs. Or if you somehow think that putting $500/month back into your 401k would make up for this disaster of a financial decision - think again.

In order to get the $50,000 needed to pay off your CCs (assuming 25% bracket, 10% penalty, and 5% state) - you would need to withdraw $83,333.33. Yes that's the right calculation.

$83,333.33 - 20,833.33 (25% fed) - 8,333.33 (10% penalty) - 4,166.67 (5% state tax) = $50,000.00

It would take you nearly 14 years at $500/month, just to put back what you took out. And then you'd have to make up for 14 years of being out of the market.


Selling the cars, and doing a 0% balance transfer are MUCH better ideas.

[disneysteve]

Although I'd love to help if OP comes back but that doesn't seem to be happening. I suspect OP didn't get the answer he was looking for.

[dczech09]

It was irritating just reading this whole series of posts. The OP is too dense and simply does not want real advise. He or she is looking for a magic wand.

Plain and simple, the cars should be sold. The OP stated that if the 401k money is not used to pay off the debt, then their financial situtation will become more imbalanced and there will be more debt. Well, that means there is a REAL problem here! And guess what? The debt is not the problem.

The problem is three-fold from what I can tell:
1) The car loans
2) The OP's reluctance to change
3) An obvious spending issue outside of the debt

We cannot help someone who won't help themselves. I hope this OP wakes up from their dream and faces reality, however we cannot make that happen. It sucks, but thats the type of people that we have in this culture. This is the mentality we have running rampant.

My point is that the problem is not math; the problem is perception. I'm off my soap box now

[jpg7n16]

Originally Posted by dczech09

Plain and simple, the cars should be sold. ...

My point is that the problem is not math; the problem is perception. I'm off my soap box now

I'm not sure how those are exclusive. Math changes perceptions. And many perceptions are based on math.

Here's a challenge: explain why the cars must be sold, but don't use any math to support your decision.


Being able to contribute $500/month would probably feel great.
Realizing that the math shows that $500/month would take 14 years just to get back where you started, and then realizing you're now 14 years behind where you should have been - feels not so great.