What's the best way out of this hole?

I Really Want to Avoid Bankruptcy

by Steve Rhode

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Dear Steve,
I have unsecured credit card debt of around $25,000. I am 27 and make around $55,000, but will be getting a $10,000 raise in the next year. My financial situation at work will be improving further from there. I am just not sure if it will be six months or a year. I currently rent for housing, but will own my car in August, which will add additional money to my monthly payments. My current credit score is 603, which I know is not good but it is a result of the unsecured debt. I have spoken with a bankruptcy attorney, but I would really like to avoid that at all costs.

Since I want to avoid bankruptcy and other debt consolidation and programs that will harm my credit further, what method would be best for me to get out of this hole? I have seriously considered drawing against my 401K to reduce my debt as much as possible to improve my situation. I know this will end up costing me in the long run for my retirement, but I would really like to have the peace of mind now and get this all paid off as soon as possible. Please advise if you think that is a good idea or what would be a better approach.

The Answer:

Dear Sean,
First off, it sounds like you are doing a bunch of things right. Kudos to you.

Getting out of debt should not be a sprint, but a balanced approach. The drive to want to borrow from the retirement funds feels as if you want the debt gone quickly and that's a way to get to some money to do it.

I never like to see people touch retirement funds in situations like this. Those funds are easy to borrow but very hard to restore to put yourself back in the same financial position.

I think the smarter approach is to use a measured approach like that offered by ReadyForZero. The organization and online plan will give you a framework to follow to pay off your debt using the money you have on hand.

Once your credit gets better, you could consider an unsecured debt consolidation loan from LendingClub.com or Prosper.com and pay off that remaining credit card debt without sacrificing your retirement.

The goal at this point should be to reduce your debt, save money every month, and have some fun with the rest of your cash. Life is meant to be lived and enjoyed, even when you are getting out of debt.

Source: I Really Want to Avoid Bankruptcy at All Costs

Reviewed April 2017

Steve Rhode

Steve Rhode is an experienced debt expert who assist consumers for free to find good solutions for bad debt. He sells no products or services, just provides free assistance through his site at GetOutOfDebt.org.

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