I’m in my early 40s, married with 3 kids. Over the last two years, I took out too many loans to cover some bad financial decisions. I’ve stopped the behavior that caused this but haven’t been able to pay for a few months. Now, debt collectors are calling me every day, and I’m being sued.
Debt: $250k (all under my name)
Retirement savings: $500k
Regular savings: Enough to cover just one month
Home equity: $200k
Income: $205k per year
Should I take a 401k loan?
Use my home equity?
File for Chapter 13 bankruptcy?
Has anyone been in a similar situation? Any advice on what I can do to make the best decision? Would love to know how others handled this.
If they don’t, I think the first step is to let them know. It’s a big deal, and they need to be on the same page as you.
If you’re confident this won’t happen again, maybe a 401k loan could work, but you need to be sure. Also, if most of the debt is credit card-related, a debt management company might be able to help you get lower interest rates.
@Vesper
My spouse doesn’t know yet. I’ve been struggling and even had to call 988 for help. I want to gather as much information as I can before telling her. This forum is the first place I’ve talked about this.
@Hale
You really need to talk to her first. Depending on how she reacts, it might change how you deal with the debt. For example, if you want to refinance, her involvement might be needed depending on the state you’re in.
Hale said:
I lost money gambling and through bad stock choices. I kept buying at the peak and selling during dips. I’ve made so many bad decisions.
You need to address the gambling and stock trading issues too. I’ve been in a similar situation. Now, I only gamble $25 a year on my wife’s work fantasy football league. It’s a lot more fun to watch sports without worrying about the money involved.
Only consider a 401k loan if you’re confident your job is stable. If you default, it’ll be treated as taxable income. Also, be ready for a reduced paycheck for the foreseeable future. Depending on how much you borrow, it could be around $1,500 less per paycheck.
You might also look into a HELOC, but it probably won’t be enough to cover everything. This is a big issue, and I think talking to a professional is the best way forward.
Have you considered bankruptcy? Most retirement funds and home equity are protected in bankruptcy. Before cashing out your 401k, talk to an attorney to understand your options.
Like others said, I’d avoid cashing out your 401k unless it’s absolutely necessary. Given the amount of debt, you should consult with a bankruptcy attorney to explore your options.
I was in a similar spot with credit card APRs up to 29.99%. I took a HELOC at prime -0.5%, which came to 7.24% at the time. No fees were involved, and it helped me consolidate my debts.
Debt management services didn’t work for me. I had better luck negotiating directly with the creditors to lower rates or extend the payment period. Bankruptcy had too many consequences, including possibly affecting future job prospects.
Talk to a bankruptcy attorney. Ask whether you’d be on a 100% repayment plan or only partial repayment. If it’s 100%, you might want to consider a mix of a 401k loan and a HELOC.
The upside of a 401k loan is that the interest you pay goes back into your account. But if you lose your job, the balance can become taxable income.
Using home equity turns unsecured debt into secured debt, meaning if you can’t pay it back, you could lose your house.
Also, remember, any debt forgiven by creditors might be treated as taxable income.
Lay out all the possible scenarios. Good luck, and when you explain this to your wife, show her a plan to fix it. It might soften the blow, but be prepared for her reaction.