Debt vs. 401k vs. Cash flow

[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.

[disneysteve]

Originally Posted by PEAMAX

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 to stop the bleeding.

Your feedback is appreciated.

I agree that you have to stop the bleeding so sell the two cars and sell the two other financed items (whatever they are). And sell anything else you possibly can to raise some cash. Pay off as much of the debt as possible that way even if it means taking a small personal loan to cover any shortage. Buy two beater cars. Go on a survival budget until things are cleaned up.

It would be very helpful to list your income, non-retirement savings and each debt with total owed and interest rate plus the current resale value of the assets on which you owe money.

[asmom]

I agree with Steve, sell the one of the cars. You can then redirect the car payment into the credit cards, thus lowering your overall debt.

The fact that you haven't made a contribution in a few years is irrelevant. The tax hit and penalties for early withdrawal will be stiff.

[PEAMAX]

The car payments are a) $200/mon and b) $257.00/mon and both will be paid off in three years. We are upside down in payments so selling one would not get us anywhere. We can't sell the other two items we owe on, they are fixed property. The cards are not used anymore.

[asmom]

Originally Posted by PEAMAX

The car payments are a) $200/mon and b) $257.00/mon and both will be paid off in three years. We are upside down in payments so selling one would not get us anywhere. We can't sell the other two items we owe on, they are fixed property. The cards are not used anymore.

Can you balance transfer your cards? I still get lots of 0% interest offers. I caution you: if you do that, make sure you continue to make the $500 payment. You will pay off the balance much sooner.

[PEAMAX]

Transfering c.c. balance requires a fee and is only good for 6 months than reverts to a new rate with is higher than the rate we already have.

[Petunia 100]

Originally Posted by PEAMAX

Transfering c.c. balance requires a fee and is only good for 6 months than reverts to a new rate with is higher than the rate we already have.

Citi has a 0% for 21 month balance transfer offer. Discover has one for 18 months.

0% APR Balance Transfer Credit Cards | 0% APR Balance Transfers


In order to receive 50k in your hand from your 401k, you're going to have to withdraw 62k (20% will be withheld). Then at tax time, you are going to pay a 6.2k federal penalty plus income taxes on 62k at your highest marginal rate. If you're in the 15% bracket, that's 9.3k. Note that 6.2k+ 9.3k = 15.5k, but only 12k was withheld. So now you may have to send off a check with your income tax return. Your state may have taxes and penalties too.

But taxes and penalties aren't the biggest loss. The biggest loss is what your 62k would have been down the road if you had left it alone to grow and compound for you. You will lose that permanently. When you are too old to work, you will still want to eat, have electricity, and pay your property taxes. Don't trade those things your older self will need in order to pay off a car.

You say if you don't do this, you will never be able to get out of debt. But the car loans will be done in 3 years. Are you planning to continue financing your purchases?

Robbing your future is not the answer. The answer is to begin living within your means. Get rid of consumer items you can't afford. You can sell upside down cars, you just need to cough up the shortage from someplace else. For example, you can do a balance transfer from a credit card to pay off the shortfall. There, you just eliminated one car payment and reduced your total indebtedness.

Anyway, that is my opinion. Best of luck to you with whatever you decide to do.

[disneysteve]

Originally Posted by PEAMAX

We are upside down in payments so selling one would not get us anywhere.

That is not necessarily true. It depends on the numbers, which is why I suggested that you post that info.

If you can sell the car and then get a personal loan for the upside down amount plus a few thousand to get a replacement car, you may cut your car debt by 30% or more. That can make a whole lot more sense than paying a 10% penalty ($6,000 to $7,000 roughly) to take money out of the 401k.

[Redraidernurse]

I disagree with taking the $$ from your 401k. You have already received some great advice here but if you will post your monthly budget/finances you will receive much more help.

[bjl584]

Drawing off of your 401K should be a last resort. Since your income has been cut in half, you will need to adjust your lifestyle accordingly. Cut costs wherever posible, sell the cars, and sell anything around the house that you don't need. I would be more more inclined to take that route than to draw down my retirement.

[PEAMAX]

Selling a reliable 2005 Honda for less than we own on it and buying a 2001 POS that breaks down doesn't make much sence to me. The other car is my truck which I use for work and also is reliable. We have been selling everything we can and getting pennies on the dollar for them. We have cut back were ever possible. We've set up a meeting with a bankruptcey lawyer and a meeting with our accountant.

[disneysteve]

Originally Posted by PEAMAX

Selling a reliable 2005 Honda for less than we own on it and buying a 2001 POS that breaks down doesn't make much sence to me.

Selling a car that you can't afford and buying one that you can afford makes a lot of sense to me. That sure beats filing bankruptcy and trashing your credit for years to come.

Good luck to you.

[Redraidernurse]

Originally Posted by PEAMAX

Selling a reliable 2005 Honda for less than we own on it and buying a 2001 POS that breaks down doesn't make much sence to me. The other car is my truck which I use for work and also is reliable. We have been selling everything we can and getting pennies on the dollar for them. We have cut back were ever possible. We've set up a meeting with a bankruptcey lawyer and a meeting with our accountant.

You came here for advice but it appears your mind is already made up. Good luck.

[disneysteve]

Originally Posted by Redraidernurse

You came here for advice but it appears your mind is already made up.

Yep. I love when that happens. And I love when someone is opposed to buying a "2001 POS" when both my wife and I drive cars that are older than that, and both were purchased used.

[Redraidernurse]

Originally Posted by disneysteve

Yep. I love when that happens. And I love when someone is opposed to buying a "2001 POS" when both my wife and I drive cars that are older than that, and both were purchased used.

Yes, my 2001 used vehicle is running great and I haven't had to put any repair money into it other than typical oil change maintenance. The OP is misled if he thinks that because it's a slightly older vehicle that means it's a money pit. You are only fooling yourself if one thinks that driving a newer vehicle with a car payment attached is the smarter option.

[PEAMAX]

Originally Posted by Redraidernurse

You came here for advice but it appears your mind is already made up. Good luck.

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.

[Redraidernurse]

If you place your budget up here, we can offer some advice. Otherwise, we are wasting our time offering suggestions that you will keep shooting down.

[PEAMAX]

Originally Posted by Redraidernurse

If you place your budget up here, we can offer some advice. Otherwise, we are wasting our time offering suggestions that you will keep shooting down.

The only thing I have disagreed with or "shot down" is selling the cars. I will post the budget when I get a chance.

[disneysteve]

Originally Posted by Redraidernurse

If you place your budget up here, we can offer some advice.

Originally Posted by PEAMAX

I will post the budget when I get a chance.

I totally agree, as I stated earlier. The only way to truly get useful advice is to lay out the whole picture. I understand the reluctance to post personal financial details on the internet but quite frankly without doing so, it is impossible to get worthwhile advice. Since the only piece of the puzzle you've shared thus far has been the car debt, that is naturally where we focused our attention.

Raiding your retirement account is not the answer to your problem. The solution will only come from cutting your expenses to match your new income. And yes, that might include selling the cars. Getting $457 in car payments down to $300 in car payments would be a 35% reduction. If you don't think reducing one of your significant expenses by 35% is worthwhile, I would have to disagree.

I look forward to seeing your full budget so that we can work through it with you.

[LivingAlmostLarge]

What are the other two fixed expenses? the house? Is it too much for your income? Maybe it's time to sell or walk away and rent?