Debt Relief Agency or cash out IRA?

Question

Through many bad decisions on my part, a divorce, 2 kids in college and a third heading there in the fall, I am in over my head. I have been robbing Peter to pay Paul for a few months now (paying utilities, gas, groceries, medical bills etc...with credit cards) and have now reached the point where I cannot make the minimum payments as well as my living expenses. I am upside down in my vehicle and only purchased my home 1 1/2 yrs ago (no equity). I also have a student loan of my own coming due in 3 months. My credit was decent enough for a mortgage then, but I spent way to much money since then - some necessities and some foolishly.

My question is, at 47 years old, do I take the substantial hit in cashing out an IRA (about 50K) to pay off this debt and start over or am I better off going through a debt relief agency (A+ BBB rating). I am already in a high tax bracket so debt relief seems more appropriate. I have tried working with the CC companies to no avail and I could care less about my credit rating at this point because I am tired of being in debt and WILL NEVER go there again. Bankruptcy is not really an option for me and I would rather (would feel better about) pay what I can rather than wiping out the debt. I need this to be painful to learn my lesson well.

Just a bit of additional info, I owe about 45K in unsecured debt with interest ranging from 18-27%. My total money in various retirement plans is about 150K, not including the 50K IRA. With retirement closer than I am comfortable with, I think I need to really concentrate on that.

Thank you in advance for your wisdom.

Answer 1

Whatever you choose for a remedy (my first impulse is to suggest bankruptcy) you should protect your retirement plans. These are immune from most collection actions, the exception being govt debts (e.g. taxes) and student loans. The sad part is that the student loans won't go away except by paying them off. Miss one payment and it will hound you for 10 years. Bankruptcy will stop you from getting a home loan for only two years. Unless you have the discipline to live like a monk for a decade it sounds like you're headed for a train wreck. The kids will have to cut back to junior college or some other method of reducing costs and as hard as it sounds, don't cosign for any more student loans. Kids are more resilient than you think and they'll probably come up with their own solutions like scholarships, work study and off campus jobs. I hate to keep beating the bankruptcy horse but at least that way you could still keep your house and car. Otherwise you risk losing either or both from missed payments. I actually hope that you can avoid bankruptcy so I suggest first you talk to a financial adviser or bankruptcy attorney to see if this is in fact right for you. But if it's just the shame of the scarlet letter B then consider that pride doesn't keep a roof over your head or food in your belly.