Pay the mortgage, not the credit cards

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Dear Debt Adviser,
I was recently diagnosed with a kidney failure that keeps me from working like I could before. I ended up borrowing money from my credit card to pay my mortgage to keep up with payments until I can’t pay both credit card and mortgage. I’m now behind on my mortgage. My credit cards kept on calling, and finally I settled for a lesser amount than what I owe them. My question is: Is it OK to use money from my 401(k) to pay off debt? I would like to get rid my credit cards; that’s why I agreed to the settlement. But at the same time, I’m thinking, “Where do I get the money?” Please help me.
— April

Dear April,
No, no, no! Stop for a minute and take a breath. You have it backward and it’s not your fault. So before it is too late, let’s look at your situation with a fresh eye. First, my sympathies on your diagnosis and your personal financial problems as a result. You faced some tough decisions regarding your finances, and you are doing some things right. You are continuing to work as much as you are able, and you are trying to keep up the payment on your mortgage.

That you used cash advances to pay another debt is a recipe for disaster. It just cannot be maintained for any length of time due to high interest rates. I’m glad you wrote before you raided your retirement savings and continued doing things that may not be in your best interest, given the current economic environment and your personal situation.

Be forewarned, this response is hard advice for hard times. Do not settle with your credit card companies and do not touch your 401(k) money. Your credit card accounts are unsecured debt, meaning the creditor allowed you to borrow the money without any collateral to ensure that you would pay it back. Your mortgage is a secured loan backed by your home.

Since you need a roof over your head and the housing market is horrible for sellers right now, it might be best for you to do what you can to hold on to your home. That’s

as long as you believe you can afford to make your mortgage payment to the exclusion of all other payments, but perhaps with the exception of the payment on your car which you’ll need to get to work.

I’ll bet that the credit card collectors are calling you day and night. I’ll also bet your mortgage company is not. Why? Because the unsecured creditor needs to make so much noise in your life that you pay to get rid of them. The mortgage lender will just quietly take your house and put you out on the street.

Here’s what you should do. Stop making payments on your credit card accounts until you call the HOPE Now Alliance at (888) 995-HOPE. Ask a counselor to prepare a budget for you. It will show you what you can afford to pay on your mortgage and what you have left over for your credit card lenders. The Hope Now counselors can help you get better terms from your mortgage lender and give you a budget for living expenses and debt service. Plus, it’s all free.

I know it’s hard to think straight when someone is pressing you, and all your best instincts say to pay what you owe. But in your situation, you need to prioritize your debts and pay the important ones first. Save your retirement money, which is beyond the reach of collectors, and then do the best you can with what resources you have available. That’s all anyone can reasonably ask of you.

Good luck!

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