4 ways to overcome a loss in income

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Dear Debt Adviser,
My husband died of cancer and I am raising my three children. My youngest is 16, and in August I learned that I would no longer get her Social Security benefits. Therefore, I’ll have $2,100 less per month in income. I was trying to pay my credit card off, but I still have a debt of $18,000. My income will not be enough to pay my credit card and live. My house and car are paid for.

My question is should I go to a debt consolidator and pay $285 a month for 44 months, borrow on my retirement to pay the debt off (at least I will be paying back myself), or sell my house and pay all my debt and start over?

I also heard there is a new tax credit if you buy a house. Should I sell and then re-buy my house to free up some money? This has been very hard, and trying to know which is the right way to go is very stressful. I pray every night and every morning that somehow I can pay and continue to help support my kids until they are able to be on their own. All three have jobs and are sharing one car. Thank you so much.
— Michele

Dear Michele,
Losing $2,100 in income would be a shock for most everyone. However, from what you have written, it sounds like you may be able to meet your monthly debt obligations other than your credit card debt. With no mortgage and no car payment, you have an advantage that many do not. I can see from your letter that you are the foundation upon which your family relies, so it is very important that you remain financially strong and a safe harbor for them until they can become independent and perhaps then can help you in return. Below I have several alternatives for you to consider. It may be that any one solution won’t prove to be enough to solve your problem. However, a combination may. Here goes:

The first thing I would recommend you do is to call your credit card company and ask for a hardship program. Many lenders are more sensitive to such requests now than they were before the recession. You may need to ask for a manager to get the help you need. I also suggest that you have a payment amount ready that you feel comfortable you can meet. If they offer a six-month or a year break, take it. I’m a firm believer that things can change for the better in the future.

Second, increase your income and/or lower your expenses. What you need is about $400 a month (depending on the interest rate of your card) to continue to pay down your credit card debt. That’s $13.33 a day. Or you could add $6.67 a day to income and cut expenses $6.67 a day to get to the same place. I find that if you break a big number down into a daily or weekly target, it becomes more doable. One of my favorite ways to boost income is to look at your tax withholding. If you are getting more than $600 a year back, I suggest that you increase your deductions so you’ll have more in your paycheck each pay period.

Third, debt consolidation through a legitimate nonprofit credit counseling agency may help. Before you sign on, be sure you understand any and all fees associated with the program and that you are comfortable with the process.

Fourth, selling the homestead doesn’t work for you. Although you might qualify for a $6,500 tax credit as a repeat homebuyer, I believe a much better option may be a home equity loan, or HELOC. A HELOC will give you a low interest rate and a longer payback period. This might take some strain off of your finances, but be triple sure you can afford the payments before you decide. Defaulting on a HELOC can cost you your home. This is a less ideal solution because you are trading unsecured credit card debt for secured debt.

The only option that you mentioned that I would not recommend unless you have no other choice is to borrow from your retirement. With four other viable options to solve your current problem, there is no need to put your financial future in jeopardy for today’s financial setback.

Good luck!

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