Bankruptcy, 401K loans, and settlement companies. Are they easy solutions to the mess you may have made? Let's discuss and make sure we have all the information first.
Welcome back for the final installment of my debt perception series. Today, let me share with you four common areas of debt, including how people usually get rid of their debt, in "Debt Perceptions: How To Not Bankrupt Your Retirement & More." I hope this series has been educational for you in avoiding the most common debt traps. Knowledge is power, so let's jump in to these last four and finish strong.
No, I'm not talking about the kind you get from the bank. I am talking about the one from your mother, brother, buddy or other personal relation. It's easy to think that they'll be understanding or flexible on reimbursement or consider co-signing; however, when you go this route, you put relationships at risk. I watched relationships crumble when placed under these circumstances. In fact, the awkwardness of a personal loan long effects the relationship, even if in good standing. The principle of King Solomon, where the "borrower is slave to the lender," is inescapable no matter how well-intentioned all parties may be. Don't make that kind of gamble, jeopardizing your relationship over money. It's never worth it!
What about that ever-so-convenient 401K or 403B loan? One of the most common things I see is people check the box at work to contribute toward their retirement account but don't know how to manage the rest they bring home. Later, they end up taking a 401K or 403B loan to patch up the mess they made. This is a cycle that will fail. The perception of using retirement is you are using your own money, but you are really risking your retirement. If you leave your company for any reason while the loan is still outstanding, it will trigger the loan to be repaid in full. Once that happens, you have 60 days, and in some cases only 45, to pay the remaining balance. If you don't, you are charged a taxes and penalties for early withdrawal – these range from 45% to 55%. That is a huge tax liability dropped into your lap! When it comes to borrowing against retirement, just say "NO!"
The perception is you take the easy way out and allow a company to handle it. They are the professionals after all, right? Look, no one cares about your situation more than you do. Debt settlement companies can't even negotiate a settlement unless you are behind on payments. They may even advise you to intentionally get behind in order to arrange a settlement, which in my opinion is unethical. If you can pay those payments, you should! Debt settlement companies are the number one industry investigated for fraud by the Federal Trade Commission. One client paid $26,000 to a company only to find no debts were paid! This happens when settlement companies are irresponsible and do not communicate with your debtors, which results in them holding on to your money and not sending it off to your debtors like they were supposed to do. This is such a problem that officials, like the Attorney General of Minnesota, have had to issue public service announcements to alert the public of the dangers of these types of companies. Run from debt settlement companies. You can learn to settle debts on your own!
Bankruptcy is a common solution for many. However, the truth is bankruptcy is not as simple as you think. Many people think filing solves their problems and gives them a fresh start, but bankruptcy stays with you for the rest of your life not just 10 years on your credit report. When people consider bankruptcy, there are a few big limitations of which they are unaware. Bankruptcy does not:
More importantly, bankruptcy does not solve the spending habits and relationship issues brought on from financial strain. Also, it is not a quick fix. In the case of a chapter 13, you're looking at a court ordered 3-5 year repayment plan. Only a chapter 7 gets rid of everything, including your assets. Instead, let's make a repayment plan and get on top of this! By the way, do you have the money to file for bankruptcy? Attorney's fees alone range from $2,500 to $5,000. Long story short, bankruptcy is a not a quick or cheap fix! Make sure you are informed so you can make smart decisions.
Simply put, maybe it's time for some outside guidance! I offer a free 30-minute consultation to all and I have helped countless clients take hold of this money issue and find more money to fund their dreams!
Question: Are you in a money bind and feel at the end of your rope? Have you ever made some of the above mentioned choices? Let me know in the comments and if you're ready let me help!
Additional Action Items: Come join my FREE Facebook community, the “Strong Together Money Community,” in order to stay informed and encouraged as you grow in your financial journey. Also, check out my free e-book to gain additional tips on how to save and budget wisely. Not sure how to break free of that cable bill without feeling like you're missing out? You can cut those costs while still keeping your content! For more information, check out my Cable Cutting Academy today!
Just a couple pieces of information and we'll have you on your way to saving an average of $200/mth!