I have around $68,000 in debt from various credit cards and a personal loan. I recently took out a $29,000 loan from my 401k to help settle these debts. I still owe $15,000 from a $25,000 loan through Best Egg, and the rest is from credit cards with Chase, Target, Capital One, American Express, and Bank of America, with the largest balance being just over $10,000.
My wife and I have a combined income of just over $160,000 before taxes, but with rising inflation, our grocery bill has more than doubled, rent has increased by $700 a month over the past three years, and we have two kids in elementary school. After covering all expenses, we only have about $350 a month left, excluding debt payments.
What are the chances of settling all my debt with the $29,000 401k loan in lump sums? And what’s the best way to start negotiating?
Any advice is appreciated. This is my first time dealing with this much debt, and we used to live within our means, but inflation and raising kids have made that more difficult.
Do you have a car loan? What other debt do you have besides the $68,000? How old are you?
Without knowing all the details, my initial thought is that you need to get on a strict budget. Consider finding a cheaper car payment, rent, or other ways to cut costs. You have a solid income where is it all going?
Yes, we have two cars—my wife drives a 2020 SUV, and I have a 2022 subcompact. The combined payments are around $850 a month, excluding insurance. We rent for $2,200 a month, having recently moved because our previous rent was set to increase to $2,500. We also have a 5- and 7-year-old, so we have daycare expenses during the summer and extended care during the school year. We don’t live extravagantly, but we’ve already started cutting back and have been living on a cash-only basis for the past three months.
My wife is currently enrolled in a debt settlement program, paying about $1,000 a month for the next two and a half years.
We’re both in our mid-40s. My wife brought about $20,000 in debt, and I accumulated around $15,000 during a custody battle, and we’ve just never been able to fully catch up.
I would like to share a word of warning on debt settlement firms. Rarely are they what they appear to be on their website before you join up. They often tell you a monthly amount (in this case, $1,000) and a time frame (30 months), then when you’re two thirds of the way through, they increase both. A note stating that your creditors are being extremely difficult to work with will appear; you will need to adjust your plan to pay $1,400 each month and add an additional 18 months to it. Their fees continue to be the first thing paid in the interim.
According to several accounts I’ve read, the wife was informed early on that the amount of time had increased because some of her creditors refused to cooperate, so either more money or more time.
Target and Chase have already informed me that they only cooperate with non-profit debt settlement agencies, which is the major reason I wish to attempt things on my own. I considered hiring a lawyer to negotiate on my behalf or trying to handle everything through the legal system. However, I’m not sure how much that will save or cost.
It partly depends on how much your credit score matters to you. Credit card companies usually won’t settle for less than what you owe if you’re still making payments. Without stopping payments, you don’t have much leverage, but stopping would hurt your credit. They’re often content to keep collecting high interest rather than accepting a lower amount.
You can always call and ask about a settlement, and if they refuse to offer less than the full balance, you might ask if they’re willing to freeze the card and lower the interest rate.
Even if you manage to pay it off with the $29K, you’ll need to create a better budget and cut expenses, as having only $350 left each month isn’t sustainable and could put you back in the same situation.
Request settlements from your creditors, and they might agree to show your account as “paid as agreed” on your credit report. I’ve had success by threatening bankruptcy, but it really depends on the willingness of the person you speak with, especially if your account is already in collections. Creditors might offer their own payment plans, which could involve closing the account and reducing your interest rate. Always ask for a zero percent interest rate if possible (we did this during the 2008 housing crisis when many people stopped paying their credit cards). When they ask what you can afford monthly, provide the lowest amount you can and continue to negotiate politely. You can manage debt consolidation yourself with patience; however, I recommend only using a non-profit debt consolidation company. For-profit companies may mishandle your payments and rack up additional fees. Also, you might be able to get credits for any late fees as a courtesy.