Amber Asks...

Q: Is borrowing really a bad idea to get out of debt? Actually I don't even think this is an option seeing that my credit score is so bad. I am a homeowner in about 10,000 of unsecured debt not adding my car and house and most of this is way behind. I try to keep up with the payments but I just can't seem to manage. I have been seriously thinking about bankruptcy. Please offer any advice that you can.

A: Technically borrowing is a viable option to getting out of debt as long as you don't find yourself in trouble again and a loan will actually be part of an appropriate solution.

In your case it sounds like a loan might just be a temporary solution. If you find it difficult to meet your basic expenses or you are living close to the financial edge, a loan might be a mistake.

That being said, a loan can be a good option if it is able to lower you overall monthly outgo to a point where you have money freed up to make it through the month.

There are some sub-prime lenders that might be able to help. It doesn't hurt to contact them and see what they might have to offer. Investigating opportunities does not mean you have to do them. It just means you are educating yourself about options that might be available.

Ruth Asks...

Q: I have $4,500 in credit card debt; most of it is from emergency vet bills and car repairs ('93 Honda civic). I try to not use the darn thing, but then emergencies occur (like needing 4 new tires at once). I have about $8,500 in a 401(k) from work here. I put in when I can. No match from work. Is it better to take maybe $4000 from the 401(k) and pay off the darn credit card so I can do what you advise...put some into savings for emergencies? I am about to pull my hair out, I get so frustrated. I am a divorced 50 year old woman, no dependents (except for the elderly dog and 4 cats). I make $40,000 a year before deductions. So what is the problem? I don't eat at fancy restaurants, or go on shopping sprees. I drive a '93 Honda Civic, my house payment is $450 a month (13 years left to pay). I would appreciate any assistance you can give me. Thank you. Ruth

A:It certainly sounds like you have read my savings instructions but still how can you save when every dime goes towards other bills.

It generally a mistake to borrow from your 401(k) to pay down debt. In not all that many years you are going to need every retirement dime you can put together. While borrowing from the 401(k) takes the pressure off today, when would you be reasonably able to get yourself reinvested in your retirement and return yourself back to the same position you would be in if you had not robbed yourself?

People think that borrowing from the retirement account is a smart thing to do but it can very, very expensive money. Sure the repayment interest rate might be low but let's say you borrow money and have to repay it at 5% interest but the market takes off and is giving a 20% return. That money you take out isn't costing you just 5% it is really costing you 25% because you lost out on the increase in the retirement account. Now, if you borrow the money and it takes you a couple of years to put it back, in order for you to put yourself back in the same position you are in today you would have to reinvest the borrowed money plus the lost gains. Yikes!

I am very sympathetic about emergency vet bills. One of my dogs just had knee surgery, a cancerous tumor removed, radiation and the other knee operated on. All of it was totally unexpected and I'm sure as equally painful for her as it was for my wallet.

Unexpected pet expenses can easily leave you in a position with putting expenses on credit or putting your pet to sleep. That is an extremely hard choice to make.

Here are a couple of broad possible solutions to think about. First, bankruptcy is always a legal option. You might want to talk to a bankruptcy attorney to learn more about and get all of your questions asked. Second, it really sounds like you should consider looking for a new job. Look at the job section on my Money Saving page. You are currently 50 years old and working for an employer that is not providing you with any retirement benefit. That lack of matching support is costing you a tremendous amount of money each year. On quick estimates if you were working for a company that provided you with a match on contributions, between now and the time you retire, you would have an extra $40,000+ in your account that you are currently giving away. Finally, if you don't like those options, get a second job.

Jane Asks...

Q: I have been offered a small house and lot for a very reasonable price - $30,000.00. I am divorced with no children and I think this would be a good property for me. I have been pre-qualified for a $30,000.00 mortgage with my local bank. In the month of April I spent some money that I was supposed to pay bills with on various and sundry items that I don't have much to show for. I'm going to start keeping track of my expenditures today, as you suggest. My question is: How do I recover from overspending in April without affecting my mortgage possibilities? I have $400.00 in my emergency savings account and $300.00 in a Christmas Club. Those are the only accounts I have with any extra money in them, and obviously, I don't want to touch them. I feel so angry with myself for spending that money. Any suggestions you have would be greatly appreciated. Thank you.

A: Jane, sounds like it is a blessing that you had that savings to help you in just this situation. The logical answer is probably for you to tap your savings to make amends for last month to make sure you can get the house. It's always better to be a day late on your bills after the mortgage closes than the day before.

Remember that there is a difference between being pre-qualified and actually getting the mortgage. At this point we don't want to give the bank any reason to say no.

Maddie Asks...

Q: Hi Steve,

I don't have a lot of personal debt as I cut up all my credit cards 10 years ago. I have my mortgage, a small auto loan, and a huge elephant on my back in the form of student loans. I went to college foolishly thinking that I'd make enough money after graduation to pay off the loans. However, I haven't been able to find a decent paying job since graduation. The job market in my area is saturated with educated professionals. Moving is not an option due to my spouse's job. The interest has also ballooned on the loans due to deferrals. I've already consolidated and stretched the term of the loan out, but they gave me a terrible interest rate. I don't want to spend the rest of my life paying this back.

I've also had two kids since I took out my first student loan, which means that I need to make enough money to cover my student loans, gasoline, work attire, other work related expenses, plus daycare. There would be nothing left since some of these "professional" jobs only pay $10 an hour. I'm currently employed part-time from home but am not making enough to cover my student loan payments, which are more than my mortgage payment. I would love to be able to make biweekly payments and double up on the payments so I could get rid of the debt more quickly. How can a college educated parent make enough money to pay off student loans without sacrificing family to do it?

A: Maddie, thank you for your question. It prompted me to put together a student resource page that has some consolidation links that might be of interest. You should also take a look at the Income Contingent Repayment Plans that are available. Many people are not aware of them but they can be a blessing. Links are on my student resource page.

The realistic answer is that you might not be able to repay your student loan without sacrificing a part of family life to do it. Fair or not, this debt existed before the kids did and you did make a promise to repay it when you took it out. I doubt that the loan had a clause in it in case you had kids or jobs that pay bad wages, don't worry about paying it back. The bottom line is that loans are absolute, life isn't.

Ron Asks...

Q: Yes I have troubles but basically know what to do about it, just don't know how. In any case for a person that filed bankruptcy more than 7 years ago and now has a poor midrange credit score due to sloppy money handling, I want to buy a house in 1.5 to 2.0 years. At this point if I continue to get docked for late payments for the 1.5 years ahead will it completely destroy my credit or should I cut bait now? i.e., either repo one vehicle, not pay two credit cards, or cash out of my co. , pay all debts (except one truck) take what is left which would be barley enough to buy a condo in another state and move with no job? : )

A: Ron, before we go to extreme solutions let's think about this for a minute. It would be silly to use a cannon to kill a fly. It sounds like you are among the millions of people that, for whatever reason, are just not great bill payers. There are modern solutions that can significantly help you to not worry about bill payments. You should take a look at ManageMyBills.com and review what they have to offer. Basically, you would get a dedicated account manager to take care of your bills for you. A service like this costs less than you might think it would and it can help you to rebuild your credit.

If you simply went to extremes and had the car repoed, didn't pay the credit cards, etc. then it still does not make one bit of difference nor help you to overcome "sloppy money handling." However having a professional bill paying service, can.

Once your bills are paid on time and things are a lot more organized then your credit will start to rebuild and your score should go up. Take a look at my credit repair advice and get going on that path as well.

Karen Asks...

Q: How can I get creditors to stop calling me at all hours of the day and night.? I am seriously considering filing bankruptcy to eliminate all debts. I have just lost a job and hope to have a new job in the next two weeks or less. I could not pay all my creditors before and I surely cannot pay at this time. Thanks for any advice you can give me.

Also should I tell creditors I am filing bankruptcy when they call on the phone?

A: Karen, we answered your question on the 05/04/05 radio show today. Listen to it here.

Vanessa Asks...

Q: My Question is "My debt has not been paid for 5 or 6 years! How do I start to eliminate the debt?"

A: Start by following my "Get Out of Debt" Emergency Checklist, Credit Repair 101 and my Two-Step Plan to Help You Rebuild Your Credit.

When it comes to reducing debt there are two basic approaches. You can either use logic or emotion. The logical approach is to get a custom Debt Eliminator report from Myvesta.org and it will prioritize your repayments according to the most economically efficient way to get out of debt in the shortest period of time without increasing your monthly payments. It can shave years and loads of interest off that you won't have to pay.

The other approach works better for many in real life. It is to focus on paying off the lowest balance creditors first so you can knock them off, get a positive feeling of accomplishment and when you think you are addicted to getting out of debt, switch to the approach above.

Pick the option that you think will work best for you and then reduce all of your payments to the minimum and user the extra cash to focus your attention on one creditor. Stop sending a little extra to the bunch. Send the extra to one and put your debt reduction in turbo.

Your Money Coach For Comfortable Success,^sm

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