Dear Debt Adviser,
My husband had to take an early retirement for medical reasons. We owe about $50,000 in credit card debt. We can pay our house, utility, car and living expenses, but we have very little left for paying the credit cards. We don't want to file for bankruptcy but would like to work with the credit card people to reduce our debt by 50 percent and pay them off with our retirement savings. What is the best way to go about this?
I'm sorry to hear about your husband's medical problems. I hope everyone who thinks he can control his retirement date or whose retirement plan is to "work until I die" gets a dose of reality from your situation. Your husband was forced into early retirement for medical reasons long before he planned and may be unable to produce an income for the foreseeable future. Without income earned by your husband, your earning potential and any retirement benefits are the primary sources of income for both of you. I believe you are going to need every bit of your retirement savings.
From my perspective, the key to your decision lies with your ability to earn enough income to handle your credit card debt. With finances as tight as you describe, I do not believe using retirement savings to pay off your credit cards, even at a 50 percent reduction, would be your best option.
Please indulge me for a minute for an aside for my readers. Your financial situation is an excellent example of why it is a bad idea to carry large amounts of credit card debt. It's a really bad idea for anyone approaching retirement. You are rocking along just fine, making more than the minimum payment when something unexpected happens that reduces your income. Immediately, you are unable to meet even the minimum payment. That is why if you are carrying more than $5,000 in credit card debt, planning to pay it down as quickly as possible is a very smart financial move.
Now, here are my suggestions for you to consider other than raiding your retirement savings to pay off your credit card debt.
1. Make more money. Assess your earning capacity. Can you find a job that will allow you to pay off the cards over the next few years?
2. Take out a HELOC. Check to see if you have enough equity in your home to pay off the cards with a home equity line of credit and repay the equity line over an extended period of time. There is a small tax advantage on the interest with a HELOC that may help as well. If you have the equity, be sure that you can afford the increased mortgage payments.
3. Is a reverse mortgage a possibility? If you have a lot of equity, a reverse mortgage might be worth exploring.
4. Debt settlement is an option. I only recommend debt settlement if you use an attorney rather than a debt settlement firm. Be sure you fully understand how the process works, how your credit would be affected and what the impact would be of taking a $30,000-plus settlement out of your retirement nest egg.
Unless you have assets that you didn't mention, it could be that bankruptcy will make the most sense for you and your husband. I know that you want to avoid it, but bankruptcy is a legitimate avenue for folks who cannot pay their obligations or who don't have enough time to recover from a serious setback like an illness or very large medical bills. Check with a qualified attorney. The bottom line is that I encourage you to explore all your options and make your decision based on what is best for your financial future, not just the fastest way to get rid of your debt.
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