Liz Pulliam Weston
Question: My wife and I found ourselves in credit card debt that totaled more than $85,000 because of a personal misfortune (in other words, we didn't just go out and buy a lot of stupid stuff).
We sought out a financial counselor at our church and worked diligently with her for quite some time. Our goal is to have everything paid off in five years, except for our mortgage and maybe an auto loan. After one year, we reduced our debt by more than $13,000.
I know that's good, but it seems as though we still have such a long way to go. I am getting quite depressed and have spoken to my wife several times about bankruptcy. We believe as Christians that we have a moral obligation to honor our commitments, but I can't help but feel as though we have probably paid the money back in interest three times over already.
Our highest-interest card charges less than 10%, with the majority less than 5%. Do people really pay off this kind of debt? Or are we fooling ourselves and should we just give in? We are both in our early 40s, with some retirement money, but not much. What do you think?
Answer: You titled your e-mail "Question of the Decade," and that's an apt description. Last year 1.6 million personal bankruptcy cases were filed in the United States, a record.
Interestingly, the law that allows bankruptcy is based on an Old Testament concept of forgiving debt every seven years. Longer-term debt was seen as a kind of slavery, and lending at high interest rates was called usury — a quaint concept that you don't hear much about today.
All this, of course, was long before 30-year mortgages and revolving credit came into being. It has never been easier than it is today to get completely over one's head in debt, nor has bankruptcy had less stigma.
That doesn't mean bankruptcy is the right option for you. If you can pay your debt in three to five years, the type of bankruptcy that wipes out most unsecured debt — Chapter 7 — may not be available to you. You could file a Chapter 13 repayment plan, but that could trash your credit and not relieve all that much of your debt.
Many who file for bankruptcy are all but forced there by high interest rates that ensure they'll never make a real dent in what they owe. You're lucky that your interest rates are relatively low (which also makes it unlikely you'll pay for this debt "three times over," or anywhere close to that) and that you apparently have the income to retire this debt.
Repaying your debt on your own will, of course, require a big commitment. Many people have done it: Some sell their homes and downsize; others put their other goals on hold, including saving for retirement and their children's educations. They come out of the experience poorer financially than they might have been had they opted for bankruptcy, but perhaps richer for having honored their commitments.
It isn't an easy choice to make. You can talk to a bankruptcy attorney about your options; most reputable lawyers offer free consultations. But ultimately, the decision is up to you and your wife.
Make Sure Need Is Real Before Borrowing
Q: We would like to remodel and expand our garage and need to borrow $30,000. We can either obtain a home equity loan at 3.75% interest and receive a tax deduction or borrow from my husband's 401(k) retirement fund at 4% interest with the interest repaid to his account.
Which do you feel is a better option, or do you have another suggestion?
A: Yes. Rethink the whole thing.
It's hard to imagine a scenario in which a garage expansion could be considered a need. It's a "want," and the kind of project that will add far less value to your house than it will cost.
Your garage renovation is, then, a luxury, and luxuries should be paid for with cash. An alternative is to take out a home equity line of credit but pay it back rapidly — preferably within three to five years.
Leave your retirement funds alone. If your husband loses his job, the loan would have to be paid back quickly or the unpaid balance would become a premature withdrawal, subject to penalties and taxes.
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