# Paying off Debt/Fixing Credit Score after Divorce - Advice Needed



## cantthinkstraight (May 6, 2012)

So after my EWW's affair…. going through a MESSY divorce, losing my job and losing my house
to foreclosure in a 2 year span, I'm financially screwed and am looking for some solid 
advice from others as to how to get my debt payed off and my credit score up again the best
way possible.

*Here are the amounts I owe:
*
Bank of America - $7k
Wells Fargo - $4k
Miscellaneous cards - $3k
_(all three cards above were sent to debt collectors because I had no money to pay them)_
Lawyer fees - $2k
-------------------
*Total* = $16k

I'm waiting for my half of my ex's 401k from the divorce settlement, 
which is going to be around $25k.

I already have a 401k plan of my own from my old job, but it only has a mere $6k in it.

I just recently found a FT job that pays well and I'm living rent-free for the time being,
but want to eventually move out into my own place that's closer to the cities and my
2 kiddos. Long story short - I don't enjoy living out here. That being said, it's only
30 minutes away from my new FT job (which I start in mid June).

My new job has full benefits and a 401k plan and matches up to 5%.

My options are to either roll the divorce settlement money and old 401k money ($30k total)
into my new 401k plan and start making small payments to the debt collectors from the 
salary from my new job…. OR…. use the settlement money ($25k) to just pay all of that debt off 
at once and then roll my old 401k money into the new one and start fresh.

Thoughts? Opinions? I think the later is the best option, as I HATE being in debt
and always have (thank you marriage) but I'd also like to know if this would be the best/
most effective way to get my credit score back on track and moving in the right direction.

I appreciate any input from others who may have gone through or are going through similar situations.

Thanks.


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## Blossom Leigh (Mar 27, 2014)

putting that cash in a 401K will do nothing for your credit score

Free Credit Score Monitoring & Resources | freecreditscore.com™ has great tools for learning what will improve your score so that you can game plan on how to get from here to there...


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## cantthinkstraight (May 6, 2012)

Blossom Leigh said:


> putting that cash in a 401K will do nothing for your credit score
> 
> Free Credit Score Monitoring & Resources | freecreditscore.com™ has great tools for learning what will improve your score so that you can game plan on how to get from here to there...


I understand that.

I guess I was asking if anyone thought it'd be best (for my score)
to make monthly payments towards my debt over time or to
just pay it all off at once, to be done with it and start fresh.

Maybe I'm asking the obvious but I still wanted to get input from others.


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## dubsey (Feb 21, 2013)

With the repossession on your bureau, you're basically screwed for 7 years from the time it was reported. It's one of the credit "deadly sins".

So, that said, I'd contact each of the lenders for your cards and see if you can negotiate something with them. You're credit is jacked anyway, so, make sure you hold onto your oldest card if you can, and it might be worth it to tell the others to sit and spin, if your personal ethics allow it.

That said, while debt sucks, you shouldn't be in any hurry to fix it. The repo will keep your score low for quite a while, most likely. All you can do is bring the others current, and pay them down, and like I said, due to the repo, getting them low isn't likely to have a major immediate impact on the score.


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## Blossom Leigh (Mar 27, 2014)

On freecreditscore.com one of the strategies is making sure that your balance to available credit line is below 16% 

Age of credit lines plays into it

etc

go there and you will see what I'm talking about... you can use that cash to immediately improve your score by bringing that one ratio into line.


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## cantthinkstraight (May 6, 2012)

dubsey said:


> With the repossession on your bureau, you're basically screwed for 7 years from the time it was reported. It's one of the credit "deadly sins".
> 
> So, that said, I'd contact each of the lenders for your cards and see if you can negotiate something with them. You're credit is jacked anyway, so, make sure you hold onto your oldest card if you can, and it might be worth it to tell the others to sit and spin, if your personal ethics allow it.
> 
> That said, while debt sucks, you shouldn't be in any hurry to fix it. The repo will keep your score low for quite a while, most likely. All you can do is bring the others current, and pay them down, and like I said, due to the repo, getting them low isn't likely to have a major immediate impact on the score.


If said cards have already been turned over to debt collectors,
is it too late to salvage the accounts and keep the cc's?


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## dubsey (Feb 21, 2013)

cantthinkstraight said:


> If said cards have already been turned over to debt collectors,
> is it too late to salvage the accounts and keep the cc's?


Could vary by lender. I'm not a collections person, so I can't 100% verify how this works, but...

... so long as they haven't been charged off, or sold to an outside collection agency, the lender would want you to come current with them, and then your account will continue to be reported to the bureau. The slow/missed payments will still show, but your account will be "current". Missed payments, amounts of times you've been 30-60-90 etc days delinquent will still be on the bureau for many years, but he status will be "current". The longer in the past the missed payments are, the less impact they'll have on the score.

If they are "charged off", it means the lender sold the account and took a % of the balance on the account from that agency, and then the agency basically as the right to your debt, if they can get you to pay it. You're not under any credit obligation to the new company, and it won't help bring your account current according to the lender, so on your credit bureau, it will still be listed as a charge off.

Short story, contact the lender and verify the status of your accounts.


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## anchorwatch (Mar 5, 2012)

It's usually prudent to square off with the creditors and get rid of the debt as fast as your budget allows. 

I've found good advice and reasons for it, for debt and personal finance/budgets here...Saving Money Forums - Saving Advice

You might re-post your question on their debt forum.


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## FormerSelf (Apr 21, 2013)

Something worth considering is comparing the average percentage growth in your 401ks compared to the interest of your debts...as debts interests will be much higher. My belief is the longer those debts remain, the more they will be eating away at overall worth...so paying them off should be top priority.

I don't know what sort of timeframe you expect to receive that settlement, but if it will be an extended period, I would focus my attention on the amount sent to collections...as it will lower your stress to not get hassled by them anymore plus the threat of legal action hanging over your head. I would use 401k money for those...and the rest try to budget them (if you can) until you get the settlement to pay them off. 

My suggestion:
1. Pay off collections now with 401k money, but offer them a lump sum payment that is lower than what you actually owe. Collectors buy the debts from companies at a cheap rate...so even if you offered 25% - 40% less, they will still make money. Just say, I know I owe you 800, but all I have is 500, but I am willing to send you a check. NEVER give them your account info for EFT. Ask for a letter saying that they will take your offer...and once you have that letter, mail them check.

2.Pay off remaining debt when you get you settlement. Until then, pay minimum monthly balances...except maybe extra on your lowest owed balance if you can squeeze out a budget with what you make.

3. When debts are paid off...establish yourself a 6 month or so emergency fund to be kept in a money market account at a credit union. A cushion to fall back on if stuff goes downhill like a medical emergency or car breaks down. I would use settlement to pad that. With what you have in remainder, you could put towards retirement or wherever you want to use it or not use it for.

4. Get educated on living within your means, saving up for things instead of putting them on credit, and budgeting your cash so you can have all your living expenses covered, plus having a monthly percentage going towards retirement.

From what I see, you have a pretty good outlook as long as you budget and don't get back into debt!!

In terms of credit score...I'm a little biased against it...as the standard advice is that you have to go into debt in order to get a credit history in order to get a car or home loan. Here is a good article about how to get around this:
http://www.daveramsey.com/blog/no-credit-score-no-home


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## Nucking Futs (Apr 8, 2013)

FormerSelf said:


> Something worth considering is comparing the average percentage growth in your 401ks compared to the interest of your debts...as debts interests will be much higher. My belief is the longer those debts remain, the more they will be eating away at overall worth...so paying them off should be top priority.
> 
> I don't know what sort of timeframe you expect to receive that settlement, but if it will be an extended period, I would focus my attention on the amount sent to collections...as it will lower your stress to not get hassled by them anymore plus the threat of legal action hanging over your head. I would use 401k money for those...and the rest try to budget them (if you can) until you get the settlement to pay them off.
> 
> ...


I agree with everything above except the bold part. If your debt has been charged off by the original lender and purchased by a collection agency you can negotiate a far lower settlement than that. Lowball the hell out of them, never admit how much you have to work with, never reference what kind of deal you worked out with another collector. If you tell them that you're working with other creditors they'll know you've got more money you could be giving them.


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## dubsey (Feb 21, 2013)

Nucking Futs said:


> I agree with everything above except the bold part. If your debt has been charged off by the original lender and purchased by a collection agency you can negotiate a far lower settlement than that. Lowball the hell out of them, never admit how much you have to work with, never reference what kind of deal you worked out with another collector. If you tell them that you're working with other creditors they'll know you've got more money you could be giving them.


I'll go one step further. If it's charged off, don't give them a dime. Agencies essentially gamble that they can get more from you than they gave the lender. You signed nothing with an agency and you don't owe them a dime. There is nothing to low ball - as far as the lender is concerned, you're account is closed. Those agencies don't go back to the lender and say "CTS is all square, fix his bureau".

The bank has closed your account if this has happened. The agencies may send you all sorts of legal stuff, but legally, they can't do anything to you. Your credit was dinged when the lender charged it off and that account, for all purposes, is dead. Any money you give the agency does you no good.

Again, contact your lenders to find the true status of your accounts. If it's in collection, but still internal to the lender, work with them. If they've sold the account, it's done. You can't fix anything.


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## honcho (Oct 5, 2013)

You would lose too much money on day one to use the 401k money. If you roll it into a new or existing plan its not a taxable event. If don’t roll it into a qualified plan you will pay a 10% of the top for early withdrawal and then pay both fed and state income taxes. You would lose 10 grand of the 25 on day one. Lawyers do seem to neglect telling clients tax consequenses. 

About the worst debt collectors can do to recover the monies is take you to court and they will get a judgement which they then can get a garnishment on your wage to recoup the monies. This takes a few months to do and by then you will have started your new job. Almost all of them will take less money or work out reasonable payment plans than do the court game. Its all unsecured debt so they can go after a retirement account to recoup. 

To rebuild your credit youd be better off working a payment plan, make the payments and re-establish a track record. Paying off at once actually wont help you that much credit scorewise. 

Cashing out the 401k while it will get you to zero debtwise just costs too much to do effectively.


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## chillymorn (Aug 11, 2010)

roll whatever you get from your former wife into your existing 401k plan.

then go see a bankruptcy lawyer to see what your options are. a consultation is free. might as well see what they have to say. retirement assets are protected under bankruptcy.

your credit is already messed up filing bankruptcy most likely won"t make it worse.


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## Homemaker_Numero_Uno (Jan 18, 2011)

Keep as much cash liquid and earning some interest as you can.
Reason is, if you need a new (or 'new' used) car or want to rent a place eventually, you will need cash up front due to low credit score. Money talks. Cash is King.
Most landlords will check your credit score. Having cash in the bank will level the playing field when it comes to renting. 
Pay the credit cards off by priority, pay your attorney first. You want to be in the front of the line if you need additional representation for any reason.


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## cantthinkstraight (May 6, 2012)

FormerSelf said:


> 4. Get educated on living within your means, saving up for things instead of putting them on credit, and budgeting your cash so you can have all your living expenses covered, plus having a monthly percentage going towards retirement.


My ex was impossible to keep up with, as far as spending on
cc's were concerned. I've always been good with money, as far
as not spending what I didn't have or need was concerned.



FormerSelf said:


> From what I see, you have a pretty good outlook as long as you budget and don't get back into debt!!


Before my ex's affair and losing my good paying job/being jobless 
for 2 years, my credit was *top notch* and I was never late on
any of my bills. Not once. Sometimes life happens and you're
forced to scrape by. I lost almost everything (including my home) 
and barely made it out alive. I don't see that happening again.

This time, I'm doing it the right way, which is my way.


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## Homemaker_Numero_Uno (Jan 18, 2011)

cantthinkstraight said:


> My ex was impossible to keep up with, as far as spending on
> cc's were concerned. I've always been good with money, as far
> as not spending what I didn't have or need was concerned.
> 
> ...


Just remember, it will be a long while before you don't have to pay a premium for interest. So having cash is really important. Some people think oh, well, if I become disabled or injured, then I'll have Social Security disability or I'll have an insurance payout. It takes forever to file, and if you've had a head injury or are laid up, etc. you won't be able to navigate these waters. This is why you pay the attorney. You also put your ducks in a row and you buy credit insurance on all of your debt (if anything happens to you it will be paid off.) Have a plan, that is make sure you have someone who will take care of your affairs for you if need be, and pay the attorney a bit more to make a new will, appoint guardians for any kids or people you want to stay involved in your kids' lives, etc. 

Before you were talking to your attorney because you had a problem come up. Now you need to talk to him/her to prevent problems, or, better yet, to have a plan for when they occur.

For instance, if something happens to you and you have minor children, do you really want the money to go to them, it will end up with their sole parent. If you are disabled for whatever reason or laid up, do you want the other parent to be able to get sole custody or will you have a plan in place for continued visitation/custody, and if child is qualified for SS payments under your name/income history, make sure other parent cannot apply for it for the child (and thus pocket it.) It should be used to help with custody/visitation, i.e. if you need someone to help you.

You may think, oh, I got out of that one problem, now I am on my own and I can make everything right. Then some dufus driving drunk slams into your car...

You should always have at least 6 months of expenses in the bank. And credit protection on whatever you owe. Messes tend to breed :-( It's like any financial crisis just attracts more of the same. Not sure why, but risk management is the way to go.

It's a whole different world out there than you're used to.
You need to play tough.

The other thing, if things go south at work for whatever reason, you need to have the ability to look for another job, cash is handy. 6 months of expenses in the bank also reduces stress - you've had enough of that!


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## pb76no (Nov 1, 2012)

honcho said:


> You would lose too much money on day one to use the 401k money. If you roll it into a new or existing plan its not a taxable event. If don’t roll it into a qualified plan you will pay a 10% of the top for early withdrawal and then pay both fed and state income taxes. You would lose 10 grand of the 25 on day one. Lawyers do seem to neglect telling clients tax consequenses.
> ....
> Cashing out the 401k while it will get you to zero debtwise just costs too much to do effectively.


+100 for this.

Also, you might need to verify, but money in retirement accounts are typically safe from creditors.

I would still try to max out your 401k contributions because of the company match. But you could look into a 401k loan to help pay down the debt. You lose the returns you would make on your 401k, but you are paying yourself the interest on that loan.


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## EnjoliWoman (Jul 2, 2012)

Lots of good advice here. 

Contact lenders to find out if debt was written off. If it was, let it go with collections - you have no obligation to them. Do not even talk to them - they will re-age the account. You want it to drop off your credit report in 7 years so you do NOT want them to re-age it by communicating with you.

If the accounts weren't written off, offering to settle will often end your account. You may be better off restructuring the loan by agreeing to bring it current with _some_ of the settlement - be careful about using that money - you will have to pay early withdraw fees and taxes on it so it had better count. But if you can bring the account current, you'll have a nice account that you've had for a long time on your report - yes with some late history, but it's easier to rebuild vs. establish. A loan from the 401(k) is an excellent idea and a really good one considering you'll be earning enough that the extra deduction from your check won't hurt.

Know that your foreclosed home will sell, and if it's a short sale (and likely it will be) you will have a tax obligation on that because it's considered "income" - you got that part of the house for free. A 150K loan but it sells for 120K means 30K you got away with. You and ex will be splitting that and claiming it as income and paying tax on it. But if you check with the statute of limitations in your state, there is a limit to the time they have to file a deficiency judgement for the remaining 30K (or whatever). If the lender doesn't file in that amount of time, you've gotten out of repaying that short sell amount.

Look into a lease with option to buy when you have enough of a deposit to start looking. That way you can rent it, and in a couple years when your credit is straightened out you can finalize the sale without having to move again. It's especially a good deal with rent credits and/or a fixer-upper if you're handy - you'll be building sweat equity.

And once you get past this little bit with the debts sorted out and know what you're doing with each of them, get your credit report every year and dispute everything that isn't right.

I know people who got new mortgages as early as 3 years out from a foreclosure. The hardest part was unsecured loans - that's why it's great if you have a card that hasn't been written off and sent to collections.


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## Happyfamily (Apr 15, 2014)

First, the tax consequences of the 401K. I don't know what they are in this specific case, so find out. If there are none, pay off every dime of credit. 

It sounds like you defaulted on a house but did not declare bankruptcy. I agree with calling creditors to see if you can negotiate, but you pay off the highest interest rate first without getting into late payments on any of them.


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## DTO (Dec 18, 2011)

honcho said:


> You would lose too much money on day one to use the 401k money. If you roll it into a new or existing plan its not a taxable event. If don’t roll it into a qualified plan you will pay a 10% of the top for early withdrawal and then pay both fed and state income taxes. You would lose 10 grand of the 25 on day one. Lawyers do seem to neglect telling clients tax consequenses.


Exactly this! Beyond the tax consequences, you want to make sure you have something invested for the future

Also, keep in mind that (AFAIK) a retirement account like a 401(k) cannot be touched by creditors in case of a bankruptcy or garnishment. If you don't let that balance grow into retirement, you need to make absolutely sure that it is touched only in truly dire or emergency circumstances (need to pay for surgery or can't afford food, for instance). Your finances are looking up.

Look at it this way. Let's say you lose your job again (it can happen - the economy still stinks). You won't be able to borrow without a job. You can't get a decent loan now even with a job with bad credit. What will you have to fall back upon?


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## cantthinkstraight (May 6, 2012)

Happyfamily said:


> First, the tax consequences of the 401K. I don't know what they are in this specific case, so find out. If there are none, pay off every dime of credit.
> 
> It sounds like you defaulted on a house but did not declare bankruptcy. I agree with calling creditors to see if you can negotiate, but you pay off the highest interest rate first without getting into late payments on any of them.


I called my 401k provider yesterday and was told that the
IRS would automatically take 20% if I withdrew the money
from my plan. Which essentially is $7,600.00, so I'd only
get back about $5,600.00.

They also told me I would have to pay state taxes on it next year.


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## tennisstar (Dec 19, 2011)

I have been in your situation. Your credit is going to be messed up for many years. Bankruptcy is probably your best option. There's no sense in paying the bills if the accounts have been closed - it will not help your credit. Believe me, been there. 

It took me almost 10 years to get my credit score up and get credit freely. I did buy two homes (and still own two), but it is only because I make a good amount of money and paid higher interest rates. 10 years....

Don't use your 401k money. Tax implications. Plus it won't help your credit, so why do it?
_Posted via Mobile Device_


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## cantthinkstraight (May 6, 2012)

My BoA cc ($7k) was already sent to collections. 

They call me non-stop but I haven't bothered answering because I have no money to
pay them and they know it. As far as they know, nothing has changed.

In a month or so, I could start making small payments to them, and to the other
cc's I owe money on, as the paychecks from my new job start coming in.

I guess I would feel more secure in just getting rid of all of that cc debt at once,
rather than nickle and diming them for the next 10 to 15 years of my life.
I just want it over with. I would also like to be able to have a cc to use again 
someday. Will I really have to wait 7 years?

For the record, my home was foreclosed on. The bank bought it back.
I walked away from it and moved into the basement of my friend's townhome.

That was 3 months ago.

When I do get the 401k money from my ex, I'm not certain if that will be
rolled into my plan, or if they put the funds in a regular bank account.

I called my lawyer and he's supposed to get back to me next tuesday.


What would *you* do if you were in my shoes?


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## happyman64 (Jan 12, 2012)

Have you filed bankruptcy?


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## 2ntnuf (Jul 14, 2012)

What's your age? 

What will you have left over from your pay after you pay all the basic necessities?

Does it look like you can keep that job?

Do you have anything you don't need that you can sell and make a little money?

Can you work a part-time job and still keep the good job you have?

Bankruptcy is the very very last resort.

Best to pay back those bills on time each month. That will build your credit score. If not, like someone else said, you can get the pay-off amount lowered if you are going to pay them off and close the accounts. 

I don't need answers to the above questions. I think, if it were me, I'd take your 401K, which is the smallest, and pay off the two smallest bills(eta: or as far as it will go). I'd make payment arrangements for the rest, making certain you can pay whatever you tell them, out of the full-time job. I'd get the part-time job and make additional payments to the attorney. Then, as the lowest bill is paid off, take that money and add it to the next higher payment, checking with them to assure you can make the extra payments. I seriously doubt they will have a problem. 

Then, continue as that next higher one is paid off, add all of that to the highest bill, with the same phone call to make sure you can do that. If, at any time, you have to quit the part-time job, you will have to have let the bill collectors know beforehand, that you cannot guarantee the extra, but you do guarantee the original amount you agreed to pay per month. 

In the mean time, you will lose at least 30% anytime you cash in a 401k. 

Before you do any of this, check with an attorney, as you state you are getting ready to do. This is serious. I think you can do it, though.


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## Happyfamily (Apr 15, 2014)

cantthinkstraight said:


> I called my 401k provider yesterday and was told that the
> IRS would automatically take 20% if I withdrew the money
> from my plan. Which essentially is $7,600.00, so I'd only
> get back about $5,600.00.
> ...


I understand. They may take 20% but I understand that to be a blanket cut they take when you are not rolling it over, and may not be the actual tax consequence. Kind of like your withholdings are not actually your taxes due.

The thing you can do is put it all on a spreadsheet in order to organize it in a manner that makes comparisons straightforward. 

In bankruptcy certain things are protected, like some kinds of retirement. So that may be an option to explore. If you got to sock that away unmolested and discharge the other debts, that may be better than having your credit ruined anyway and having to struggle to keep your head above water.


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## tennisstar (Dec 19, 2011)

She will not build her credit by paying these bills off. She will just waste money at this point. Bankruptcy is her best recourse. I have been there and know. I paid on the bills for some time and it did nothing for my credit score. Bankruptcy allowed me to start over, although it took years. 

Do not touch your 401k. You will not only lose the taxes that are withheld; you will lose anything you could have made on this money. You will regret it.
_Posted via Mobile Device_


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## tennisstar (Dec 19, 2011)

2ntnuf said:


> What's your age?
> 
> What will you have left over from your pay after you pay all the basic necessities?
> 
> ...


I know you think you are giving good advice, but you are not. Basically you are setting the OP up to struggle and still not improve her credit. 

OP, read online at how people sign up with these places that help them settle their debt. The articles will often tell you that their credit is still shot.

Please let me repeat, paying these bills now will not rebuild her credit. This is a myth many people buy into.
_Posted via Mobile Device_


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## 2ntnuf (Jul 14, 2012)

tennisstar said:


> I know you think you are giving good advice, but you are not. Basically you are setting the OP up to struggle and still not improve her credit.
> 
> OP, read online at how people sign up with these places that help them settle their debt. The articles will often tell you that their credit is still shot.
> 
> ...


Bankruptcy is better than paying off the bills by working a little more? It won't help his credit rating? I thought it would, but I guess, once it's with collections, he's screwed? 

Yeah, I can assure you, I'm not intentionally setting him up for a struggle. Certainly, I can be wrong. 

Will it take longer, less time, or the same amount if he files for bankruptcy? 

What happens when you file for bankruptcy as just a working stiff, not a business owner?


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## 2ntnuf (Jul 14, 2012)

Hopefully, you come back and shed a little more light on your statements there, tennisstar. You could be helping more than just OP.


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## cantthinkstraight (May 6, 2012)

happyman64 said:


> Have you filed bankruptcy?


No.

I know nothing about the process.

What would be the benefit of doing that?


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## cantthinkstraight (May 6, 2012)

I know my credit will be jacked up for a few years, but
filing for bankruptcy when I have less than $20k in debt
and am about to start a new job where (after expenses) I should
be able to bring in $2,000 or $3,000 a month seems excessive.

Although I could be wrong.


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## 2ntnuf (Jul 14, 2012)

Seems like that amount of money would help you quickly pay those debts. I heard on this radio show last night, and was surprised by his comment to a caller, that bankruptcy should be the last resort. I'm not some learned scholar, just a man. That's why I commented to ask your attorney before you do anything. I truly don't know myself, but that was what I would consider doing. 

Dave Ramsey Homepage - daveramsey.com

Maybe this site can help you some. I hope so. I'm having issues, too. That's why I was reading your thread and hoping to see some good information posted.

eta: How to get out of debt---> http://www.daveramsey.com/articles/content-center/category/lifeandmoney_debt/


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## FormerSelf (Apr 21, 2013)

After hearing how much you are penalized for raiding 401k, I agree that perhaps that may not be ideal.

I am in the middle if bankruptcy...the means test for bankruptcy shows that if you are a single earner and make less than $52k a year, then you ought to be eligible for bankruptcy.

Bankruptcy, although it doesn't help your credit score, it does have your debts written off (after they rifle through your assets to see what they can liquidate and pay your creditors) and federally protects you from being pursued by collectors. Gone. After seven years the charge-offs should go away from your credit score. Like others have said, the damage has been done to your credit...but if you are someone that morally wants to pay what you owe, then I am sure you can handle it, it just may be tight until you pay off the debt and have that safety cushion established. Unfortunately, time will only help your credit score...once you get back to paying your creditors regularly, and move past the dings. In you case (and mine as well), cash upfront will be a necessity.

BTW, I have been excellent paying my balances my entire adult life, but a few marital and financial upheavals coupled with a sudden cancer diagnosis put me in a place where I had to say F-it about paying my bills. I had been successfully paying my debts down through Dave Ramsey's baby steps, but I got knocked out of the game...and had to wave the white flag. I hate that, but what can you do?


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## honcho (Oct 5, 2013)

You already have a retirement plan in place of your own. Instruct your lawyer to have the amount received from her account rolled into that account. It’s a qualified plan so the withholdings wont happen then. It’s the least amount of paperwork and the easiest way to do it. 

As far as your debt problem, although it seems like a great deal of money it doesn’t pay to file for bankruptcy on that amount of money. The legal fees etc will cost you probably 3 grand and that lawyer will want the money up front. If you had the money you wouldn’t need bankruptcy, you could buy enough time to starting your job. 

Honestly you might as well answer the phone, tell them you are going thru a divorce, are homeless and unemployed. You have no hope of paying them back. The worst they can do is hire an attorney and take you to small claims court, that is it. Even then the worst that can happen in court is the judge will order a garnishment of your wage which will be around 15% of your gross max. All this takes time and by that time you will have started the job.

If bofa has sold the debt off to a collection agency you are dealing solely with that agency. They will check the court records, see that you are in divorce etc and realize you got nothing to go after. They will send you monthly nasty grams and maybe an occasional phone call but that’s about it. Once you are employed again and can build up a little cash reserve then be pro-active and take care of the bills and work out an agreement to repay the debt. Its all unsecured debt, they cant chase any asset or potential asset. That is why cc companies charge such high interest rates. 

They will take less money, if bofa has already sold the debt to an agency the agency probably paid 3 grand for the 7 grand of debt. This is how the agency makes money. 

Leave the 401 money alone, nobody can chase that, its exempt from just about any collection. It’s the worst move you can make to get rid of a headache. Working out a realistic payment plan when you have cashflow again, sticking to that plan and the debt will just not take that long to go away. Your credit score will build back up again much better that way and wont take years to rebuild either.


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## happyman64 (Jan 12, 2012)

cantthinkstraight said:


> I know my credit will be jacked up for a few years, but
> filing for bankruptcy when I have less than $20k in debt
> and am about to start a new job where (after expenses) I should
> be able to bring in $2,000 or $3,000 a month seems excessive.
> ...


You are probably right. 

Would your parents let you get a credit card under their name and address to start rebuilding your credit?


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## tennisstar (Dec 19, 2011)

I was asked to shed more light on my statement.

The reason I suggest bankruptcy is once the balances have been written up and sold, the OP's credit is shot for at least 5 years. She can work hard, pay a little each month, etc, but her original debt with the creditor has been written off. Another company owns the debt and thus, the original creditor will never get the money. The original creditor considers it a bad debt and has written it off.

So the OP will pay off another company that bought the bad debt on pennies on a dollar. These companies count on people not knowing the way credit scores work and people wanting to do the right thing by paying a debt. They even use wording to make you think you are doing the right thing and will rebuild your credit. 

With your credit, all those late pays and closed accounts will haunt you for years. The foreclosure will haunt you. You may be able to buy on credit, but your interest rate will be quite high. 

If you file bankruptcy, you discharge the bills and the creditors stop harassing you. You get a new start. I don't say fresh start because the bankruptcy will be on your credit report for at least 7 years. However, you keep your money and you can slowly rebuild your credit. In a few years, you start getting credit cards, etc. You don't lose your 401k money, which you will need in retirement. 

I filed for bankruptcy after my divorce. I ran up credit cards supporting a young son when my ex didn't pay court ordered child support (he never paid it but that's another story). Also I tried to live like I did before the divorce and well, as a single teacher with a child, I couldn't keep the same lifestyle. It came to the point that I was paying everything late, then couldn't pay my credit cards, etc. I tried negotiating smaller payments with the credit card companies, but the interest they were charging me went through the roof. Interest upon interest charges made small amounts grow into huge amounts. 

Upon advice of an attorney, I filed bankruptcy. By thus point, the loans had been sold to third party companies and I was being harassed both at home and work (at my new corporate job which I dearly needed to keep). I hated, hated, hated filing bankruptcy. It made me feel like a failure. I had worked so hard to get my degree and get a decent job and I had to do this? It hurt so bad.

In the end, it was a good decision. The harassment stopped. I discharged the credit cards, and was able to start a 401k, which after all these years has grown substantially. I bought a new car within a few years, but of course,y interest rate was higher. I bought a home within 2-3 years after bankruptcy. Again, I paid a higher interest rate. Within 5-6 years, I was getting credit cards and able to refinance the mortgage. 

The bankruptcy stayed on my credit report for 10 years, but it didn't affect me as much after 5-7 years. Now it is off my credit report and I have a 800 plus score. But I have not paid a bill late since before the bankruptcy. Any late pays would bring that score down. 

It was a difficult road and I know the OP has a hard choice to make. But please don't get fooled into thinking you can pay these third party companies off a little at a time and salvage your credit. While it sounds good and people eoll tell you it works, I've been there and all your efforts will just wear you out and get you nowhere. Had I spent those 5-7 years paying back that debt, I would have no 401k and probably a lower credit score now. It just doesn't work the way you think it will work. Please take it from someone has been there.
_Posted via Mobile Device_


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## tennisstar (Dec 19, 2011)

happyman64 said:


> You are probably right.
> 
> Would your parents let you get a credit card under their name and address to start rebuilding your credit?


She can't rebuild credit while these are sitting on her record and haven't been discharged.
_Posted via Mobile Device_


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## cantthinkstraight (May 6, 2012)

tennisstar said:


> *She* can't rebuild credit while these are sitting on her record and haven't been discharged.
> _Posted via Mobile Device_


(cough)... He....


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## DTO (Dec 18, 2011)

2ntnuf said:


> Bankruptcy is better than paying off the bills by working a little more? It won't help his credit rating? I thought it would, but I guess, once it's with collections, he's screwed?
> 
> Yeah, I can assure you, I'm not intentionally setting him up for a struggle. Certainly, I can be wrong.
> 
> ...


I've heard a formal bankruptcy is worse for your credit than even being in collections. Then again, you can only file once every 10 years so subsequent creditors have that little bit of protection.

It does cost money to file. And, my understanding is that debtors are means-tested. If you can pay something, it's more likely you will be made to do so.


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## cantthinkstraight (May 6, 2012)

I only have $200 to my name until my first paycheck, which
I assume won't be getting for another 3 weeks. So financially, I'm
in a rough spot.

I think what I'm going to do is cash out the 401k from my
old job, take the $5k, pay the $2k in taxes and use that money to
get some new work duds, pay my lawyer, fix my car and make a small pmt
towards each of the cc's I owe on, except for the one that's w/ collections. 

I'll call the one cc that is with collections and see if I can
talk them into lowering the amount owed. Offer them a
check for $3k in 2 months or something. See what happens.

Then, I can make monthly payments on the other cards until
they're taken care of.

I think I'm also going to instruct my lawyer to make sure that the
settlement money from my ex's 401k is transferred to my
new 401k plan, so I won't have to pay taxes on it.

I'll have bills paid, car fixed, new work duds, lawyer taken care of
and some cash to hang onto and $25k in my new 401k account.

Seems the most logical to me.


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## Homemaker_Numero_Uno (Jan 18, 2011)

cantthinkstraight said:


> I only have $200 to my name until my first paycheck, which
> I assume won't be getting for another 3 weeks. So financially, I'm
> in a rough spot.
> 
> ...


It's already halfway through the year, so if you are going to take a hit on withdrawal from IRA then it's best to do it in a lower-income year. Though am not sure about the short sale being income and how that's handled. 

You should set aside some of that cash to consult with an enrolled agent, they are a special kind of accountant who are qualified to adress/handle tax issues with the IRS, they know their stuff inside and out, vs. someone who isn't an enrolled agent. I would expect you will see an immediate return on any fees. They are not so high as you might think. Mine has saved me a lot of money over the years, and even when not using her services, because she always explained the advice and made it easy to understand for future reference.


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## tennisstar (Dec 19, 2011)

Think about getting some financial advice. You are doing what you think is best, but it is best to consult a professional. 

I think you are going to find it take years to rebuild your credit. I'm not trying to be negative, but you need to realize the way credit works.
_Posted via Mobile Device_


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## cantthinkstraight (May 6, 2012)

tennisstar said:


> Think about getting some financial advice. You are doing what you think is best, but it is best to consult a professional.
> 
> *I think you are going to find it take years to rebuild your credit*. I'm not trying to be negative, but you need to realize the way credit works.
> _Posted via Mobile Device_



After being out of work for a year and a half and losing
my home to foreclosure after a messy divorce, I think
that is a given.

Where can I go for solid financial advice?
I suppose I'd have to pay for that too...?


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## honcho (Oct 5, 2013)

Before just cashing out your smaller 401 look into seeing if they have the option of loans. Some 401 are designed where you can borrow against it. In a few short words basically you are being your own bank. The 401 is the collateral for the loan so if you don’t pay it back the 401 would default to make the payment.

Call the company that the plan is with and ask them that question, it could save yourself paying taxes and penalties on the money. Since in essence you are borrowing your own money the credit score/loan approval works differently. 

If you do just cash it out, take the notion that it’s the last bit of money you have on earth. Paying much of anything on credit cards at the moment is far down on the list of priorities. Fixing a car understandable, clothing, food, rent all that makes sense but the cc balances other than keeping them at bay for a month or two your not accomplishing much at the moment. 

Id rather have food than pay 50 towards a 3k debt that they cant do much about. Sounds overdramatic I realize but I think you see my point. You have a light at the end of the tunnel, a new job and a divorce that should be finalized soon. You’ve been thru the worst of it.


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## cantthinkstraight (May 6, 2012)

honcho said:


> Before just cashing out your smaller 401 look into seeing if they have the option of loans. Some 401 are designed where you can borrow against it. In a few short words basically you are being your own bank. The 401 is the collateral for the loan so if you don’t pay it back the 401 would default to make the payment.
> 
> Call the company that the plan is with and ask them that question, it could save yourself paying taxes and penalties on the money. Since in essence you are borrowing your own money the credit score/loan approval works differently.


Good idea. I'll do that, but I need to act fast.
Like I said, I need some quick money and bad.



honcho said:


> If you do just cash it out, take the notion that it’s the last bit of money you have on earth. Paying much of anything on credit cards at the moment is far down on the list of priorities. Fixing a car understandable, clothing, food, rent all that makes sense but the cc balances other than keeping them at bay for a month or two your not accomplishing much at the moment.


The only reason I'd like to make a small cc pmt is
to make sure the other cc's don't go to collections as well.



honcho said:


> Id rather have food than pay 50 towards a 3k debt that they cant do much about. Sounds overdramatic I realize but I think you see my point. You have a light at the end of the tunnel, a new job and a divorce that should be finalized soon. You’ve been thru the worst of it.


True.


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## EleGirl (Dec 3, 2011)

cantthinkstraight said:


> I called my 401k provider yesterday and was told that the
> IRS would automatically take 20% if I withdrew the money
> from my plan. Which essentially is $7,600.00, so I'd only
> get back about $5,600.00.
> ...


Did they break down what that 20% was?


It's usually a 10% penalty and then tax withheld. So the second 10% is probably income tax withheld.

There are things for which you can make a hardship withdrawal from a 401K. You would have to determine if your need fits any of the criteria. But it's good for you to know about this.

Hardship Withdrawals Give Access to Your 401k Savings, But at a Cost - 401khelpcenter.com


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## EleGirl (Dec 3, 2011)

Some have mentioned taking out a loan on your 401K.

When I take out a loan on my 401K, most of the interest I pay on that loan go into my 401K account. So basically I paid myself the interest... not a bad way to go.


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## cantthinkstraight (May 6, 2012)

EleGirl said:


> Did they break down what that 20% was?
> 
> 
> It's usually a 10% penalty and then tax withheld. So the second 10% is probably income tax withheld.


They said the IRS takes 20%. Plus taxes for next year.



EleGirl said:


> There are things for which you can make a hardship withdrawal from a 401K. You would have to determine if your need fits any of the criteria. But it's good for you to know about this.
> 
> Hardship Withdrawals Give Access to Your 401k Savings, But at a Cost - 401khelpcenter.com


I asked him about the hardship withdrawl and he didn't mention
anything about it being an option for me. He glanced over it 
quickly, like it wasn't an option for me.


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## cantthinkstraight (May 6, 2012)

EleGirl said:


> Some have mentioned taking out a loan on your 401K.
> 
> When I take out a loan on my 401K, most of the interest I pay on that loan go into my 401K account. So basically I paid myself the interest... not a bad way to go.


I'll check their website and see what's there regarding this
option. If I can't find anything on it, I'll ask when I call them
back tomorrow.


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## EleGirl (Dec 3, 2011)

cantthinkstraight said:


> They said the IRS takes 20%. Plus taxes for next year.


You need to double check. The law states 10%.

"Distributions received before age 59½ are subject to an early *distribution penalty of 10% additional tax *unless an exception applies. Qualification for a hardship distribution is not an exception to this early distribution additional tax. For more information about the treatment of retirement plan distributions, refer to Publication 575, Pension and Annuity Income."

Tax Topics - Topic 424 401(k) Plans
Tax Topics - Topic 558 Additional Tax on Early Distributions from Retirement Plans, Other Than IRAs





cantthinkstraight said:


> I asked him about the hardship withdrawl and he didn't mention
> anything about it being an option for me. He glanced over it
> quickly, like it wasn't an option for me.


It's good to know about though in case you need to use it in the future.


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## cantthinkstraight (May 6, 2012)

Taken from their website:

• 10% early withdrawal penalty
• Entire distribution is subject to 20% mandatory federal 
income tax withholding


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## EleGirl (Dec 3, 2011)

cantthinkstraight said:


> Taken from their website:
> 
> • 10% early withdrawal penalty
> • Entire distribution is subject to 20% mandatory federal
> income tax withholding


Right. 

The 10% early w/d penalty you the feds keep.

The 20% mandatory fed tax withholding is handled just like all fed taxes. At the end of the year the w/d is added to your total income. The 20% tax taken out is added to the total amount of taxes you paid. And you get a refund if they took out too much in taxes.

Depending on your tax bracket you could get most of that 20% back. If you did tax planning early in the year you could figure out what your taxes are going to be at the end of the and decrease the amount of taxes taken out of your pay checks if the 20% puts you way over what you will owe.


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## cantthinkstraight (May 6, 2012)

Here's what it says on their website regarding taking out 
a loan against your 401k.....

At first glance, borrowing from your 401(k) may seem like a suitable option. It offers attractive rates and some convenience. It’s a quick process, as you don’t have to wait for a credit check to qualify for a 401(k) loan. You can borrow for any reason. And while the interest rate of a 401(k) loan depends on your individual savings plan, the most common rate charged is usually prime + 1%, according to the National Bureau of Economic Research. (To locate the going "prime rate" check out Bankrate.com.) Although this rate appears better than the interest on many private loans and credit cards, there are pros and cons that you need to be aware of.

Many believe this type of loan should only be considered a last resort. If you’re thinking of taking out a loan from your 401(k) here are five additional points to consider before making a move.

• Borrowing Limits There are typically limits on the amount of money you can borrow from your 401(k) savings plan, usually up to 50% of your vested account balance or no more than $50,000, whichever is less. So, if you have $20,000 in your account, you can borrow no more than $10,000.

• Automatic Deductions Loan repayments usually begin during the next pay period, often via automatic deductions from your paycheck. The repayment period is usually 5 years, more if you borrowed to buy a home.

• Default Risks Individuals are defaulting on their 401(k) loans to the tune of roughly $37 billion a year, according to a study by Robert Litan, a researcher at the Brookings Institution. If for any reason you are unable to repay the loan, you’ll be considered in default. At that point, the outstanding balance is subject to taxation, in addition to the 10% penalty for those who withdraw before reaching the age of 591⁄2. Note, if you do default, the issue will not be reported to any credit reporting agencies and will not impact your credit status. But, lenders may ask you to disclose any and all personal financial information when applying for future loans so it could still make an impact on your ability to secure a loan.

• Early Pay Back Risks If you lose your job or switch employers, be prepared to repay the loan in full very soon, usually within 60 to 90 days. Otherwise, the outstanding loan balance will be considered a distribution and subject to nearly 25% – 40% in taxes and penalties.

• Diminishing Returns While working to repay your loan, it’s likely that you may not be able to contribute as much – or at all – to your 401(k) plan, passing up on the tax-free compounding interest and compromising your overall savings potential for retirement. In fact, some plans forbid contributing to your 401(k) until the loan is repaid. That means losing out on any employer matching contributions, in addition to your funds’ gains.


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## BURNT KEP (Oct 3, 2012)

cantthinkstraight said:


> I only have $200 to my name until my first paycheck, which
> I assume won't be getting for another 3 weeks. So financially, I'm
> in a rough spot.
> 
> ...


I have taken out money early from my 401k the 20% they take half you lose due to a penalty the other half is federal withhold. Of course at the end of the year you it will be counted as income so you will have to pay tax on it. As for paying off the debt I have read stories of the bad debt being sold off many times and people being contacted over 10 years later.


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## 2ntnuf (Jul 14, 2012)

BURNT KEP said:


> I have taken out money early from my 401k the 20% they take half you lose due to a penalty the other half is federal withhold. Of course at the end of the year you it will be counted as income so you will have to pay tax on it. As for paying off the debt I have read stories of the bad debt being sold off many times and people being contacted over 10 years later.


For me, when I had to do this, I let them take 30% up front to pay taxes and penalties. It worked out fairly well. Our incomes are different so, YMMV.

CTS, you have to make sure those debtors and collections companies send a letter to the credit bureaus that the debt was satisfied. Many times, they seem to forget or overlook that part. Many times, that is why the rating is worse than it need be. It will still be bad, but it's bad already. 

Please don't think I'm saying one way or another is best. I am not. You have been given different scenarios from other's lives. You have been given advice. You must make your own decision about how to handle this.


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## dubsey (Feb 21, 2013)

CTS - 

Here's what I'd do if I were you, and why. I say this as a person who is entirely uncomfortable carrying debt.

1. Do not cash out your 401K. Roll it over into some other investment. It's not worth the hit you'll take on the payout because...

2. Your credit is hosed for a few years anyway. Carrying that other debt isn't going to make it any worse.

3. Wait and see how your income and bills shake out a month or two after you're employed. I remember "stretching" to purchase my current home. I regretted it for a while because I didn't feel like I was going to have as much disposable income as I wanted month over month. I was wrong. Once all the payments and everything stabilized, it's more than ok.

4. Pay just enough on your accounts to keep them current, or any additional to start paying it down that keeps your disposable income in a comfortable area.


My reasoning for all of this is that due to the repo, you're credit score is going to be low anyway. You'll still be able to secure a loan for a home or a car in the not too distant future if you need to, but you'll need more money down than typical. You're not in a situation where a quick fix to your debt is going to help you down the road. You can pay those down over say the next 3 years, then you'll be set to put $$ away for a couple years for a down payment.

Sorry your in this situation, but you really need a long term plan. I don't think the quick fix buys you anything, and will just mess up your long term retirement by taking those funds away from your future.

Feel free to PM me if you want to know the foundation of why I believe this way. I'm not comfortable putting my background & employment out there for all to see.


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## rlm008 (Jun 3, 2014)

If it was me I would get the debt out of the way ASAP. Your credit score is not really a concern at this point, because you can always build it back up (even though we all know it will take time, it will be better before you know it).

By paying on the debt you lose more do to interest when you could totally free yourself from the debt and use that same money in an interest bearing account.

Take the gift you've been given and run with it. Your in a great position to build a new life for yourself.


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## turnera (Jan 22, 2010)

I cashed out one of my 401Ks and paid the taxes/penalty upfront. We are now approaching banks to use the $30,000 left as collateral for a bigger loan at low rate to pay off all the debt at higher rates.


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## keepontrucking (Sep 26, 2014)

Nucking Futs said:


> I agree with everything above except the bold part. If your debt has been charged off by the original lender and purchased by a collection agency you can negotiate a far lower settlement than that. Lowball the hell out of them, never admit how much you have to work with, never reference what kind of deal you worked out with another collector. If you tell them that you're working with other creditors they'll know you've got more money you could be giving them.


Just make sure you pay nothing until you get a letter stating pay for delete. I was told by a creditor once we will wipe it from your credit (wells fargo) they tried to pull a fast one when I disputed the credit report. I sent in the pay for delete letter to the 3 credit agencies and it was off my credit within 30 days


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## keepontrucking (Sep 26, 2014)

also how old are your debts? my wife had a credit card that was in default and she hadn't made a payment in 7 years, we were buying a house and she wanted to take care of it before we looked into financing, she made a deal and paid it off in 3 monthly installments. Guess what the debt showed paid but late and the first of the 3 payments triggered the debt to be new from that point, so another 7 years till it dropped off.


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## Ynot (Aug 26, 2014)

OP, I don't know anything about your particular circumstances but I can speak as someone who has faced financial ruin and moved forward. 
As long as you have the bad debt your credit score will never improve. It will be reported every month and continue to negatively effect your credit
An option you may not have considered is the option of bankruptcy. You have already been thru a divorce. Bankruptcy is really nothing more than divorcing your creditors. I believe you divorce because your spouse cheated on you (?). You had good cause to break the contract of marriage. That is why we have divorce as an option - the contact of marriage ceases to benefit one or both parties and the contract is dissolved.
Bankruptcy is the exact same thing. The kicker is that while in divorce you are facing off with a real live human being who themselves have emotions and morals (even though you may hate those), in bankruptcy you are dealing with an amoral entity who's primary concern is simply getting from you what they want.
From your OP, you are already past the point of working things out with your creditors. It is time to dissolve the contract and get on with your life. Just like you did with your divorce.
Divorce and bankruptcy are just different versions of contract law that we have here to allow us a do over. 
It may cost you in the short run - 401K or settlement money, but with bankruptcy, there will be finality and closure - just like with divorce. Your credit cannot get any worse. And just like divorce, from the ashes of your financial ruin you can arise like a phoenix and do so quickly.


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## Mary May & Bobby (Sep 13, 2014)

START FRESH! 

If you don't like debt (and who does), and you have the money to be done with it, do it!

It's much easier to worry about your credit when your dent free, than to chip away at debt while banks are shanking you with interest.

Pay your debt, and start fresh. That's my advice.


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