401(k) Withdrawals for Debt & HELOC for Divorce Settlement

[myrdale]

Saturday I got to attend a really good Friend's wedding. A couple of other close Friends were there as well.

The conversation started with Friend #1 asking my opinion.

He wants to with draw from his 401(k) to pay off credit cards. The short answer from me was "No".

He has a good job, but I don't think he knows the first thing about budgeting, and he has child support for his ex-wife and the same for an ex-girlfriend. He comes across as one of those "I'll deal with it later" types. I think "later" has finally caught up.

Even if he pays the credit cards off with the money, with out a radical change I believe he will go back into debt. I did suggest he should consider stop contributing temporarily and focus on the debt. I believe he could borrow against the 401(k) but I am not convinced that is a good idea either. I did not ask the scale of debt, but my assumption is +$10-20k.

The Friend #2 then asked what my thoughts were for him taking out a HELOC to pay off his truck and for $40k divorce settlement. For the truck, my answer was a hard "No". For the divorce settlement, I told him "Maybe".

Should Friend #2 consider a personal loan instead of a HELOC?

Should Friend #1 prioritize paying off debt over the 401(k)?

With out any more specifics, do you have any better thoughts for the two of them?

[ua_guy]

Can the residence be sold to settle the judgement and maybe zero out the other debts?

Child support x2 women, a divorce settlement, credit card debt, and a truck loan... Doesn't sound like a problem that friends will be able to solve, even with good advice. I think he needs to have a financial "Come to Jesus" moment by himself. My answer would be get rid of the truck and drive a beater, sell the house, and maybe start thinking longer term about life decisions...

[myrdale]

Doesn't sound like a problem that friends will be able to solve, even with good advice. I think he needs to have a financial "Come to Jesus" moment by himself. My answer would be get rid of the truck and drive a beater, sell the house, and maybe start thinking longer term about life decisions...

You're pretty close to what I am thinking.

Friend #1 with the ex's and credit cards (and I think still car loan) looks to be cracking around the edges from trying to hold the mess together. We'd had plans a month ago to do something (free) but he had to cancel last minute for the chance to work overtime. He is the one I posted about a few years back about his mother maxing out credit cards in his name. I am unclear if it is that same nonsense or not.

He bought the house before the first marriage. I suspect the house payment is far cheaper than rent. I am not quite on board with that suggestion to sell.

Friend #2 a beater might be an idea. Selling his house might be worth considering. I don't know the details around it. He was on track until his wife decided to walk a different path.

[ua_guy]

You're pretty close to what I am thinking.

Friend #1 with the ex's and credit cards (and I think still car loan) looks to be cracking around the edges from trying to hold the mess together. We'd had plans a month ago to do something (free) but he had to cancel last minute for the chance to work overtime. He is the one I posted about a few years back about his mother maxing out credit cards in his name. I am unclear if it is that same nonsense or not.

He bought the house before the first marriage. I suspect the house payment is far cheaper than rent. I am not quite on board with that suggestion to sell.

Friend #2 a beater might be an idea. Selling his house might be worth considering. I don't know the details around it. He was on track until his wife decided to walk a different path.

Oh, now I see... You're talking about two different friends with two different sets of financial issues. For some reason I thought you were discussing with friends how to help one person with all the problems. I agree then, more information is probably needed. Like does the friend with the house have equity, and could he even get a competitive interest rate, or qualify at all? How far ahead or behind is the truck payment and is there any equity, and at what rate is he financing?

Sounds like the buddy who skipped a social engagement to work overtime is doing that right at least. It sucks, but at least he's trying to make more money.

Cutting back retirement contributions to work on immediate debt is usually a good start. I'd be cautious though, if your buddy can still contribute enough to snag an employer match, that might be worth doing. All else goes to paying off debt, though.

[LivingAlmostLarge]

Friend #1 - 401k down to employer match and work on digging out. Hopefully he can turn it around or else he'll either declare BK or go back to court and show why he can't pay child support etc.

Friend #2 - why does he need a HELOC? Do they have any other assets he can give instead of HELOC? If he's buying out the equity why can't he give up retirement QDRO or taxable account?

[myrdale]

Oh, now I see... You're talking about two different friends with two different sets of financial issues.

Yes, sorry I wasn't clearer. All this started while standing around a tailgate in the middle of a cow pasture drinking a couple of beers with Friend #1 and #2 before a wedding for Friend #3. I always shudder when the conversation starts with "Ben you're the smartest person I know and I want your advice...". And that was followed up immediately by "Let me tell you about my situation too".

Friend #1 is 35 while Friend #2 might be 30. My guess is they see me at 42 I am comfortable enough, with the house and truck paid off, and some disposable income. But I don't have the complications of ex-wives and children either.

I think Friend #1 has had his head in the sand about finances for several years. He is within arms reach of that personal come to Jesus meeting I think.

I think Friend #2 has a much better sense about his finances, but he still has the wind knocked out of him from the fresh divorce and family health issues.

[myrdale]

Friend #1 - 401k down to employer match and work on digging out. Hopefully he can turn it around or else he'll either declare BK or go back to court and show why he can't pay child support etc.

Friend #2 - why does he need a HELOC? Do they have any other assets he can give instead of HELOC? If he's buying out the equity why can't he give up retirement QDRO or taxable account?

I am now realizing the confusion of discussing two separate issues in the same thread, my apologizes.

I don't think #1 is bankrupt yet. I think its going to such digging himself out of credit card debt though. He says he is having trouble with bills. I assume child support isn't slipping though.

Friend #2 needs $40k to pay the ex-wife. I am assuming this has to do with equity in the house. Your suggestions are exaction what I am looking for.

[crazyliblady]

Saturday I got to attend a really good Friend's wedding. A couple of other close Friends were there as well.

The conversation started with Friend #1 asking my opinion.

He wants to with draw from his 401(k) to pay off credit cards. The short answer from me was "No".

He has a good job, but I don't think he knows the first thing about budgeting, and he has child support for his ex-wife and the same for an ex-girlfriend. He comes across as one of those "I'll deal with it later" types. I think "later" has finally caught up.

Even if he pays the credit cards off with the money, with out a radical change I believe he will go back into debt. I did suggest he should consider stop contributing temporarily and focus on the debt. I believe he could borrow against the 401(k) but I am not convinced that is a good idea either. I did not ask the scale of debt, but my assumption is +$10-20k.

The Friend #2 then asked what my thoughts were for him taking out a HELOC to pay off his truck and for $40k divorce settlement. For the truck, my answer was a hard "No". For the divorce settlement, I told him "Maybe".

Should Friend #2 consider a personal loan instead of a HELOC?

Should Friend #1 prioritize paying off debt over the 401(k)?

With out any more specifics, do you have any better thoughts for the two of them?

I think that Friend #1 temporarily stopping 401K contributions to deal with credit card debt is doable, but not ideal. Obviously, he could lose some growth in his retirement, but that's probably better than ballooning credit card balances. However, he also needs to create some kind of spending plan, but based on his "deal with it later" attitude, this may not happen.

I think Friend #2 could take a different approach, but it's a painful one. What about 1) selling the truck to help settle the divorce issue since even an old truck can sell for a lot, 2) buy a less expensive vehicle, 3) and only take out a HELOC if there is no other option. To me, it does not seem worth it to risk your house. I would rather take a small amount from retirement than a HELOC.

[crazyliblady]

You're pretty close to what I am thinking.

Friend #1 with the ex's and credit cards (and I think still car loan) looks to be cracking around the edges from trying to hold the mess together. We'd had plans a month ago to do something (free) but he had to cancel last minute for the chance to work overtime. He is the one I posted about a few years back about his mother maxing out credit cards in his name. I am unclear if it is that same nonsense or not.

He bought the house before the first marriage. I suspect the house payment is far cheaper than rent. I am not quite on board with that suggestion to sell.

Friend #2 a beater might be an idea. Selling his house might be worth considering. I don't know the details around it. He was on track until his wife decided to walk a different path.

Did he know his mother took out credit cards in his name? He could bring charges against her.

[bjl584]

Friend 1 should stop contributing to the 401K and try to increase income to pay off debt. Classic Dave Ramsey advice here.

Friend 2 is a bit more complicated especially with divorce in the mix. They may want to start selling off assets as opposed to getting another loan.

[disneysteve]

The conversation started with Friend #1 asking my opinion.

He wants to with draw from his 401(k) to pay off credit cards. The short answer from me was "No".

He has a good job, but I don't think he knows the first thing about budgeting, and he has child support for his ex-wife and the same for an ex-girlfriend. He comes across as one of those "I'll deal with it later" types. I think "later" has finally caught up.

Even if he pays the credit cards off with the money, with out a radical change I believe he will go back into debt. I did suggest he should consider stop contributing temporarily and focus on the debt. I believe he could borrow against the 401(k) but I am not convinced that is a good idea either. I did not ask the scale of debt, but my assumption is +$10-20k.

I agree with you completely. It doesn't sound like he's ready to change. Withdrawing or borrowing from the 401k is just putting a bandage on a gunshot wound and endangering his future even more.

He needs to seriously change his ways. Hopefully he's done impregnating and deserting women and won't rack up any more child support responsibilities.

I would suspend 401k contributions if he can manage the discipline to actually apply the additional take home pay to his debts. He also needs to slash his spending Dave Ramsey style. "Don't see the inside of a restaurant unless you're working there." Get as much overtime as he can at his job if that's an option. If not, get another job or side gig to boost income and put every penny of it toward the debt.

The Friend #2 then asked what my thoughts were for him taking out a HELOC to pay off his truck and for $40k divorce settlement. For the truck, my answer was a hard "No". For the divorce settlement, I told him "Maybe".

The HELOC may or may not be a good idea. It all depends on the interest rates and on his level of discipline. If the rate is better, it might make sense to use it to pay off the truck. I'd also suggest he look into refinancing the truck as rates may have come down since he bought it. And I agree with you that the HELOC might be okay for the divorce settlement but we'd really need a lot more info to give a good answer to that. Chances are it's the same as friend #1 and that he needs to slash his spending, boost his income, and redirect every penny he can toward the divorce and truck.

[myrdale]

Hopefully he's done impregnating and deserting women and won't rack up any more child support responsibilities.

Disneysteve, you shouldn't make assumptions like that.

In the case of his ex-wife, he was working 60 hours a week to support her being a stay at home mom with the newborn. Then he found her boyfriends military dry cleaning in the trunk of the car. The boyfriend was coming over to his house during the week while he was at work.

In the case of the "baby mama" she claimed to have been on birth control from the start, but confessed after she got pregnant she quit with out telling him because she "wanted his child". They worked it out and he was going to stand by her. Before and during this he was getting random harassing text messages he assumed were coming from the ex-wife. They weren't. Around the two month mark she had a miscarriage, and didn't tell him. Miracle of miracles she immediately got pregnant again and carried the child to term. At what he thought was a 4 or 5 month checkup he found out she was only a month or so into the second pregnancy. Around the same time he received text from her that she forgot to spoof so it showed her real number. At that point he was out and has been fighting for full custody as soon as the child was born. (In retrospect it has just occurred to me that his legal bills are most likely the major factor here).

Maybe you could make the argument that he "should have known" she had a miscarriage. For reference, she is a bigger girl. I saw her later into the second pregnancy and you really couldn't tell she was that far along. And I have a hard time arguing that he should have used protection while he thought she was pregnant.

It is my personal opinion she has some type of uncontrolled mental handicap. Either way it leads her to calling the police on him, on his parents, on his current girlfriend who lives out of state. This isn't once offs, this is a couple times a month for the past two years. Every time the police show up, they realize there is nothing there and leave. Its random, no clue when or where. It is just a step under SWATing.

I've been to dinner with him and she will call him +50 times in an hour period. 300-500 calls a day isn't unheard off.

You just don't understand the level of crazy he hitched his wagon to.

In the first case he had a child with a woman he loved and intended to spend his life with until she decided she wanted a different man.

In the second case, he should have been more responsible but trusted she was honest about the birth control. When he worked out she was sending the text the entire time, lied about a miscarriage he was done.

[ua_guy]

Isn't that what's scary, though?

-The lack of judgement or foresight in picking a spouse, overall, or agreeing to be a spouse, and then later deciding you want something different. That's not how that's supposed to work, and yet, it's seems to be a majority of marriages (or separations).
-The lack of planning to have children and provide for them without destroying one or both parents' lives for the next 2 decades, just to pay for said children. More than 50% of the time it seems neither parent actually wants to raise the kid, but they end up having to.
-The probability of repetition of the two scenarios above with at least one, maybe two more shack-ups, following separation and/or infidelity, and resulting in financial ruin.

As a childless man, I can stand here and cast extreme judgement on how ridiculous this all is, wring my hands, and say it's "no wonder" so many people are in the pickle they're in. I don't see them as victims...

[myrdale]

Isn't that what's scary, though?

-The lack of judgement or foresight in picking a spouse, overall, or agreeing to be a spouse, and then later deciding you want something different. That's not how that's supposed to work, and yet, it's seems to be a majority of marriages (or separations).
-The lack of planning to have children and provide for them without destroying one or both parents' lives for the next 2 decades, just to pay for said children. More than 50% of the time it seems neither parent actually wants to raise the kid, but they end up having to.
-The probability of repetition of the two scenarios above with at least one, maybe two more shack-ups, following separation and/or infidelity, and resulting in financial ruin.

As a childless man, I can stand here and cast extreme judgement on how ridiculous this all is, wring my hands, and say it's "no wonder" so many people are in the pickle they're in. I don't see them as victims...

His ex was a Hooter's waitress. Extremely attractive. She came across as a fun date, but I wouldn't have married her. I am not casting disparages at the job, I'm just saying there is stereotype that appeared to fit her. That said he dated her for a year, then they were engaged for two years before marriage. With that amount of time, I would have thought the judgement and foresight would have been checked.The "shack-up" is probably a good description of the "baby mama".

The other friend, I don't know much about her other than they were both big church go'ers who dated for a year before marriage, and one day she walked in and said we're done. Luckily there are no kids in his case.

Of course I only hear one side of the story, but neither of them seem to have went into marriage haphazardly.

[myrdale]

Disneysteve, you shouldn't make assumptions like that.

Sorry if that reads like me being snippy. It's not. Nor is your statement unreasonable based on stereotypes.