Please help advise

[dyingindebt]

We are drowning in 40k of debt..... we make about 115k a year. I was thinking of cashing out 30k out of 401k to get it under control. We are being slammed with free and 30% interest rates- I think it would be best to cash it out to make ends meet. Husband works 50hrs a week- goes to school and I work 2 jobs and we have 3 kids. What should I do.......... We are falling apart!!

[sweeps]

A frequently asked question.

Withdrawing from your 401k may be tempting, but it is very costly and should be a last resort.

Your first step should be getting your financial situation in order. Do you have a budget? Are you sticking to it? Can you cut out some expenses so you can pay down debt more quickly?

Your second step should be trying to pare down the interest rates. Can you negotiate a lower rate with your lenders? Can you transfer the balance to a no- or low-balance card/loan?

Your third step should be trying to find extra money for paying down the debt more quickly? Can family members help? Are there assets you can sell?

Your answers to these questions may generate more discussion.

[jIM_Ohio]

first thing to do is see the problem- which you have. Fixing it is a matter of managing details.

step 1- budget what the 115k each year is being spent on now, and what it should be spent on. Look at the expenses and see what can be cut. cable, phone, eating out, vacations, travel...

step 2- use the new budget for a month or so and verify it works.

step 3- this is important- do not charge ANYTHING. Stop going into debt deeper. If you cannot do this step, none of the fixes will really work.

step 4- list the debts and create a plan to pay them off. My guess is a family of 5 can live off 60-80k, leaving around 10k-30k per year to pay off debts. If you have a tax return, adjust withholdings from jobs so you do not get a refund (you need that money added to take home pay now).

list the debts like this
30% CC 20,000 payoff $200 monthly payment
29% CC $1,000 payoff $29 monthly payment
28% CC 40,000 payoff $300 monthly payment
27% CC $2,000 payoff $10 monthly payment
8% 2nd mortgage $50,000 payoff $1000 monthly payment
6% 1st mortgage $100,000 payoff $666 monthly payment
1% CC $2000 payoff $10 monthly payment
0% CC $10,000 payoff $20 monthly payment

* on any 0% CC or mortgage, also list how much credit limit is available (if you have 40k of home equity or room on that CC, the solution might be easier).

If any debts are 15k or less, there are some possible solutions to consider.
It always makes sense to pay off debt with highest current interest rate first. However if you have $2000 per month you can send to debt... it may make sense to pay off lower balances in one swoop to reduce the clutter of how many bills to pay. Each situation is different.

You need to post
a) a budget
b) a list of debts, highest interest rate first, with payoff amounts and monthly payments.
c) a list of income sources (might be part of budgest, depends how you do it).

[disneysteve]

We are drowning in 40k of debt..... we make about 115k a year. I was thinking of cashing out 30k out of 401k to get it under control. We are being slammed with free and 30% interest rates- I think it would be best to cash it out to make ends meet. Husband works 50hrs a week- goes to school and I work 2 jobs and we have 3 kids. What should I do.......... We are falling apart!!

Without knowing any more details, I'd say that 40K of debt is not so bad with a 115K income. When I finished school, I had 102K in student loans and our income was about that after a couple of years in practice.

What is probably killing you, as you mention, is the interest rates. 30% makes it really tough to make a dent in the balance. I would do as others have said and that is to try and lower the rates, refinance, balance transfer as much as possible. The other thing is to sit down and make a dollar by dollar review of your current expenses and spending pattern and cut out or decrease everything you possibly can. I know it seems overwhelming, but 40K truly isn't that bad given your income. I paid off my debt (along with 2 cars) in 12 years. You can probably get rid of yours within 5.

As for the 401K, absolutely do not cash it out. You might possibly want to borrow from it, though I don't recommend that either. When you tell us more about your situation, we can give more specific advice, but I think this should be very doable for you to pay off in a reasonable period of time.

[bucketheadmn]

We are drowning in 40k of debt..... we make about 115k a year. I was thinking of cashing out 30k out of 401k to get it under control. We are being slammed with free and 30% interest rates- I think it would be best to cash it out to make ends meet. Husband works 50hrs a week- goes to school and I work 2 jobs and we have 3 kids. What should I do.......... We are falling apart!!

The main thing in paying off any debt is that you have to be ready and willing to make sacrifices in order to pay down your debt. You should sit down and list every expense that you have - you first need to get a handle on where you money goes and what would be able to be cut out. If it helps post a itemized out list here for others to help you take a real look at it.

[hellodeli1]

30% interest

Um, what are you borrowing that you're getting hit with 30% interest? That's loan shark interest. You should call your creditors and ask them for a break -- and take everything that you can get. You've been a good customer, so you should be able to get a few concessions. And, you should of course be attacking that debt and get it totally paid off.

[bishop]

first make a commitment not to charge anything from here on out, and save some money in an emergency fund (that way you don;t have to charge it when life's unexpected turns come up). Second, I would suggest paying off your debts in a slightly different manner than was previously suggested, for psychological reasons. You will have to find extra money somewhere (it may mean TEMPORARY sacrifice, but you need to do it)...it might mean getting rid of cable/satellite tv, hi-speed internet, not eating out, not going to the movies, no Starbucks, etc. Take a HARD look at what you are spending money on, and cut out TRUE nonessentials. Then list your debts from smallest balance, to largest balance. Pay the minimum payments on each debt, except the smallest, and put all your extra money on that one. As soon as that debt is paid off, take your extra money PLUS the payment for the now paid off debt, and ADD it to the minimum payment of the next smallest debt...keep repeating until you get everything paid off. By getting several smaller debts paid off faster, you give yourself a HUGE mental and confidence boost, as you see progress in getting out of the hole. It is much easier to continue on and being faithful in paying them off, when you see more victories. Good luck!

[jIM_Ohio]

Um, what are you borrowing that you're getting hit with 30% interest? That's loan shark interest. You should call your creditors and ask them for a break -- and take everything that you can get. You've been a good customer, so you should be able to get a few concessions. And, you should of course be attacking that debt and get it totally paid off.

My guess is being late with a credit card payment a few times, missing a few payments... that type of thing.

[jIM_Ohio]

first make a commitment not to charge anything from here on out, and save some money in an emergency fund (that way you don;t have to charge it when life's unexpected turns come up). Second, I would suggest paying off your debts in a slightly different manner than was previously suggested, for psychological reasons. You will have to find extra money somewhere (it may mean TEMPORARY sacrifice, but you need to do it)...it might mean getting rid of cable/satellite tv, hi-speed internet, not eating out, not going to the movies, no Starbucks, etc. Take a HARD look at what you are spending money on, and cut out TRUE nonessentials. Then list your debts from smallest balance, to largest balance. Pay the minimum payments on each debt, except the smallest, and put all your extra money on that one. As soon as that debt is paid off, take your extra money PLUS the payment for the now paid off debt, and ADD it to the minimum payment of the next smallest debt...keep repeating until you get everything paid off. By getting several smaller debts paid off faster, you give yourself a HUGE mental and confidence boost, as you see progress in getting out of the hole. It is much easier to continue on and being faithful in paying them off, when you see more victories. Good luck!

I agree this can work. I also agree with other posters than $40k is not a HUGE amount of debt.

The main issue is to create a budget, make sure it works, and follow it. Cutting out any extra expenses.

Depending on the debts, it might make sense to pay off lowest balance first. It might make sense to pay off highest interest rate first. This is why I suggested listing them (in order of highest rate to lowest rate), this isn't necessarily the order I would pay them off, but it provides some organization to the issue.

[Tree0164]

With your income, 40k isn't a lot of debt. However you need to get serious about paying it down. Doing the 401k isn't a smart move-figure about 40-50% of that being taking out for taxes and it can ruin your retirement.

1) Stop charging anything
2) Make a budget (post your budget here if you want help)
3) Cut out anything extra like eating out, going to the movies etc. Cell phones switch to lower plans.
4) Sell stuff to get yourself into a better financial position
5) Research the snowball method of paying off debt
6) Check out any balance transfer offers
7) Keep coming back here for motivation and support!1

[bishop]

I agree this can work. I also agree with other posters than $40k is not a HUGE amount of debt.

The main issue is to create a budget, make sure it works, and follow it. Cutting out any extra expenses.

Depending on the debts, it might make sense to pay off lowest balance first. It might make sense to pay off highest interest rate first. This is why I suggested listing them (in order of highest rate to lowest rate), this isn't necessarily the order I would pay them off, but it provides some organization to the issue.

yes, based on their stated income, I have to agree also, $40K isn't a lot of debt, comparatively speaking. I also re-read your post, and realized what you were saying (I skimmed it kind of fast the first time - my mistake), and also agree they need to at least know what each debt is, what the balance is, and what the rate and payment are, to figure out the game plan. Ultimately, it comes down to discipline not to charge, to tighten the belt for a little while, and to pay off the balances as aggressively as possible.

[dyingindebt]

Wow---I feel 40k is a huge amount. I feel like we are dying..... Plus we claim 1 or 2 for our dependents and get a 15k tax refund. I think we need to change that. I really appreciate all of the input. I am really going to try hard to get this under control. We never go out to eat- we dont take the kids out to the movies but maybe once every couple of months.... I am calling the creditors on Monday to talk about the interest rate. Thanks for your support!

[dyingindebt]

I should say I didn't include our mortgage in the debt- that was just credit and loans and such not our mortgage.

[disneysteve]

Wow---I feel 40k is a huge amount. I feel like we are dying..... Plus we claim 1 or 2 for our dependents and get a 15k tax refund. I think we need to change that.

OMG!! You need to change that first thing Monday morning. Think of how big a chunk of your debt you can repay in the next year with that alone. It is crazy to loan the IRS 15K interest free all year.

[sweeps]

OMG!! You need to change that first thing Monday morning. Think of how big a chunk of your debt you can repay in the next year with that alone. It is crazy to loan the IRS 15K interest free all year.

Actually it's worse than an interest-free loan. OP probably lost $2,000-$3,000 to CC interest charges this year because of excessive withholding.