Okay all you budget gurus - Are we nuts?

[3boymthr]

A few years ago DH and I got into debt as a result of lousy cars, bad teeth, a lay-off and well some bad decisions, and an attempt by DH to get his own company off the ground that didn't work out. So quite a bit of debt (in excess of $25,000 ).

We got to a point that we no longer had to put anything on the cc and are paying cash for everything or if we did put it on the card paying off that amount and slowly paying down our debt.

Well, today when I got the cc statement I noticed that our interest rate on our debt had doubled to 28.99% - with no notice (I'm emailed my statements so the notice might have gone astray in my spam folder) - and that our minimum payment no longer covered our monthly interest. I do pay more than minimum it's just the point of the whole thing.

To top it off last week I found out that while my job is not being cut and my pay rate isn't being cut my paycheck is effectively being cut as I was told that if I no longer have anything to do but things like filing or other busy work I was to pass this work off to the full time employees and go home and while this would not count against my paid time off or be treated as absentee-ism or anything like that- I wouldn't be paid for when I left.

So I talked to DH about it and we're going to clear out his 401(k) and pay off the debt and then make payments in a couple of months into an IRA for me (taking advantage of the tax deduction) continue to put money into his 401(k) if they'll let us or put the same amount into an IRA for him and put what we were normally paying on the debt into a savings account and if I get laid off or have a week where I don't work at all while nothing will go into savings, at least we won't be late on cc payments.

What do you think are we crazy?

 

[missenmickey]

Sorry to hear about your situation.

If you take money out of your 401(k) prior to retirement age you will pay a huge penalty. Is there another way you can start paying down debt without the 401(k)? It would be a shame to lose a chunk of what you have already saved.

 

[ElizK]

That stinks. Be aware that you'll lose about 40% of the money you withdraw. Can you do a 401K loan, instead? It's not great, but better than losing so much of it.

 

[msmayor]

Removing $25,000 or so from a 401(k) as an early withdrawal will cost you somewhere in the neighborhood of $4,000-6,000 or so in additional income tax PLUS a $2,500 penalty for early withdrawal. Paying down that debt immediately could cost you around $8,000 extra, due to the IRS in a year.

In addition, the cost to you is big in terms of lost opportunity for compounding. It will take you a long time to not only amass the money you removed, but to make up the lost income from the time you took it out to the time you build it back up.

Can you opt out of the change in terms and close the account, keeping the rate as is and continue to make the payments?

 

[SandrA9810]

i was once able to call citi when i noticed on a bill that they doubled the interest rate. I told them i wanted to close the account, of course they transfer you to a different department. I told them, put the interest rate back or close the account, because i never recieved any notice of the change. They put it back. But less than a year later i recieved a change of terms notice and opted out of it.
You might be able to get your old rate back if you close the account.

You might have way more to loose by taking from your 401k than paying the interest rate.

 

[fortheluvofpooh]

yes, look into a loan from your 401 K. Do not cash it all in. We did that a few years back when DH was out of work for an injury. HUGE penalty!!!

 

[punkin]

bad bad bad idea for so many reasons

 

[Evi]

I'm so sorry to hear about your current situation. Thankfully this shouldn't happen so easily with the new cc rules but in mean time, I think your right to want to pay down your cc first.

I'd contact a credit counselor from an established nonprofit company. If possible I'd start by holding a huge declutter sale. sell anything and everything you really don't need and use that money to pay down on your cards. This may not amount to alot it may only be a couple of hundred but you have to think its money you didn't have and its stuff you didn't need. I'd contact a few banks a local credit union and see if you can get a loan for the balance on your debt with a low intrest rate and then transfer all the balances over and close the cc's. Then you will only make one low payment a month. My brother went through something similar when he got divorced. They had to both pay off the debt so he got a loan to pay his percentage and then just kept up with the loan.

Good luck I hope it all works out.

 

[SOnotLayuh]

I'm so sorry, this is awful!

Good luck with everything, I know you're up against some difficult decisions !!

 

[sparklynails23]

Have you looked into unemployment?

 

[nunzia]

I wouldn't take money away from my future..a loan maybe, but don't close it. Can you call the credit card and opt out and then pay off the card at current rate? This might be a good time to apply for and get a different card for TRUE emergencies if you feel like you need have one 'just in case, and then pay of the big one under old rates. I don't have CC debt, but I do have cards..I'm just more comfortable using them and not my debit card for online stuff, etc. If you are facing income reduction you might work on building up emergency fund rather than paying down CC, but I can understand wanting to have CC debt GONE, so only you can decide how to work that. I always try to do it all...and it works to some degree. Save some, pay extra some, go on trips ( I am of the school that really feels vacations are a huge part of life..I know too many people in my age group who waited 'until' to go have fun and then something horrible would happen and 'until' never came) So I work my second job ..can you get a second part time job and slap all of that on your CC..and do Ebay..can you ebay stuff, have a yard sale or two? and live CHEAP.

 

[loveysbydesign]

A 401 K loan is a great idea as long as your dh plans to stay at his place of work until it is paid off. We've done this though my dh's work and it was fine(we had to buy a new furnace and replace plate glass windows in the old house we bought)

 

[3boymthr]

Unfortunately, a 401(k) loan is not an option at this time. DH's company is small and doesn't have the provisions in place. Also unfortunately, because I'm working part time/ mother's hours - so unemployment or under-employment isn't an option here in MA - I wish it was.

We did think about the tax penalty - it's high, but we'll be paying more than that in interest this year and we planned to up our tax with-holdings to compensate. Last month's interest accruals were over $800 . Which works out to about $9,600 for the year if not more. We didn't touch the balance last month in fact our balance increased because while we paid more than the minimum the increased rate increased the balance by more than we paid. Even before that we were only paying the balance down by about $100/month. At that rate it will take me about 50 years to pay it off.

We did the de-clutter thing and are doing the de-clutter thing and will continue to do the de-clutter thing. DH also collects scrap metal and does side work to raise extra money. We've been using this money to fund those extras that come along like school projects and parties, the whoops, the kids have outgrown their clothes moments, etc.

So far so good, you guys haven't come up with any negatives I didn't already think about.

 

[mrsklamc]

A couple people have mentioned opting out of the rate change. Is that not an option?

 

[maggieusa]

this is a very bad Idea you will be paying for it in the long run .

 

[msmayor]

If your monthly interest charges are $800 then your 'more than $25,000' must be a LOT more than $25,000, because at $800/month interest that works out to about a 38% rate on $25,000.

No need to share the total. Just be aware that for every $1,000 of 401(k) you take out, you'll only net about $650 after tax.

If you are going to also need to take out enough to cover the big tax bill, your effective cost is even greater.

If you are planning to also remove enough to pay the tax bill, then to 'clear' $25,000 to pay down the debt you will need to remove close to $38,000...a cost of $13,000.

Have you considered the idea of simply suspending all 401(k) contributions for now and throwing all that money toward the debt to pay it down faster?

 

[Crystal824]

I wouldn't take money out of a 401(k) at all. First of all you have to pay the tax and penatly. If you take a loan, you are actually paying double tax. The money is being taxed when it comes out and then you are paying it back with after tax money. Plus, you will likely need that money in retirement.

I would also be wary in starting the IRAs. I hope you don't, but if you should ever need the protection of banruptcy, money in a 401k is protected, money in an IRA is sometimes not meaning you could lose it in a bankruptcy.

I would call and try to get the interest reduced. Sometimes if you close the card, which hurts you credit score, but may help you with repayment in the long run, the company will give you a lower rate until the card is paid or allow you keep the rate you had.

If that doesn't work, perhaps you should consult a credit counselor. You should definitely make sure they are reputable because there are alot of ones out there that aren't. Tip: pretty much all of them that requrie you to stop paying your cards and put the money in a bank account with them until they settle it for a lesser amount: not reputable. You will likely get sued before the debt is settled. You could do this without paying them a fee.

 

[loveysbydesign]

Nopt sure how old/young you are...but if you are quite a bit aways from retirement age and this is the only option you have then I say do it. Only you have to live your life and you will reap the benefits/consequences!

 

[maggieusa]

You need credit councling to help you have too much debt to do this on your own.

 

[msmayor]

I just ran a very quick and crude spreadsheet. Assuming a simple APR of 28% annually on $30,000 of debt...if you suspend all 401(k) contributions now and can throw $1,000/month at that debt, AND not add to it, you can have it retired in less than 5 years.

If you can opt out of the rate increase and keep the interest rate at the lower level, you can retire it even faster.