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I have a potentially complex situation that I am looking to resolve in the least painful way possible.

I am going through a divorce. My income is nearly twice as much as my ex's, and I am going to have to assume over 16k in debt out of the agreement. It is all credit card debt. I also have a car payment and student loan debt, along with a home mortgage with a maxed line of equity. Even with the outstanding mortgage, plus the maxed equity, I have still approximately 30% in gross equity. Naturally, in the agreement, she will be getting half of this equity as a result of me refinancing to get her off the deed. Along with this, I have a small 4 figure IRS debt that we will owe. I will probably be forced to pay 60% of it.

My question concerns the best way to handle the credit card debt. I have a good distribution of debt to balance right now and my FICO score is close to 800 and I want to protect this fiercely. I KNOW am going to have additional expenses coming in the form of lawyers fees, court costs, etc, and I am debating liquidating 401k cash in order to avoid adding more debt on my cards.

My highest card rate is around 11%. My other card is slightly higher but has a lower balance. Both cards hold a variable APR.

I've been offered, and accepted but not yet used, a 0% promo rate for a year that I can move the bulk of my 11% balance to (there will be some left though). It will go to 13% after the promotion period.

I mention all this because the portion of 401k I want to liquidate is going to be more than what I need; my 401k administrator suggested that I withdraw as much as I can from my 401k without crossing into the next tax bracket for 2015. They will hold the initial penalty taxes in escrow and pay it immediately to the IRS.

So I'm considering using the remainder to pay off these cards to a zero balance, which leaves me with having to pay the remaining 401k taxes that will come due in 2015. And my initial plan is to save the money I would have used to pay the card payments and instead store it in a safe interest bearing instrument until the taxes come due. I'll be able to save much of the tax bill, and as I see it, in a year I'll be almost if not completely debt free, penalty paid to government, then I can concentrate on making contributions back to my 401k plan (my employer does not contribute, which is why a loan against it isnt an option either).

Normally I know I would never recommend to anyone to liquidate their retirement savings, but I am in a position where I literally have credit as my other choice for lawyers and if these get maxed out prior to my refinance, it will hurt my rate. And since I actually need the cash, I dont see consolidation being an option; I'm trying not to spend any credit at all.

If you were me, what would you do? If I missed anything important, I'll be happy to add in comments.

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    You can't borrow from your 401k? If you withdraw then you are paying tax/penalty which means you are paying 30%-40% for that money! You don't mention the value of your home or the equity amount. It may be you should sell instead of refinance. – AbraCadaver Mar 31 '15 at 20:13
  • Selling isn't an option for a variety of reasons. This is a difficult divorce, I have children, and this is the house they grew up in. The house will be mine when it's all said and done. And no, since my employer does not contribute to it, I cannot borrow from my 401k, only liquidate a portion of it. And I am in a very good position on my home as I see it; even after the refinance I should have a fair amount of equity remaining; the house is nearly 50% paid for right now. – anon Mar 31 '15 at 20:16
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    First, sorry you're going through this, but if you check, unwillingness to sell the house (unless it is super cheap versus a cheaper one or rent) for sentimental/child reasons sinks most divorcees. If you want a plan from someone here you need to provide specifics like salary, debt balances, 401k worth etc. I wouldn't borrow at 30%-40% until all options were exhausted and I was living the cheapest of lifestyles (meaning super tight budget). – AbraCadaver Mar 31 '15 at 20:25
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    I don't know the worst because there are scant details. But an 800 credit score is worth $0 to me. It's only needed if you want to borrow money and get to the point where you are now, and I don't (at least not for years). – AbraCadaver Mar 31 '15 at 20:36
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    "since my employer does not contribute to it, I cannot borrow from my 401k" - Not all plans allow for loans but this sentence is not correct, the employer contribution is unrelated to whether loans are permitted. – JTP - Apologise to Monica Apr 1 '15 at 2:20
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Withdrawing from your 401(k) may include a 10% withdrawal penalty. There are ways to avoid the withdrawal penalty for early disbursements.

The idea is to reduce your interest expense by leveraging free loans (0% APR purchases). This will help you pay down your debt more.

If you have 0% APR on purchases, you can make purchases on things you already buy. Then use that money towards other debt, while making monthly payments on the 0% APR card. This way, you pay off the credit card before the 0% APR changes. You can then rinse and repeat on another 0% APR card offer. If your credit score is 800, you can do this multiple times. Citi Simplicity gives you 18 months 0% APR. Chase Slate and Chase Freedom gives you 15 months 0% APR. Others typically give you 12 months or less.

  • Barclay has (or did when I got it, about 8 months back) a card that offered 2 years at 0%. Also, the Chase Slate card offered no-charge balance transfers. – jamesqf Apr 1 '15 at 5:10
  • Offers change sometimes. When I used Chase Slate several years ago, it was 18 months. Now it is 15 months. If you have a link to the Barclays, I'd be interested to know. If Chase Slate offers fee free BT (balance transfer at 0%), you can request them to cut you a check and see if they will mail it to you to "to pay off another credit card". When the check comes, you just deposit it in your checking and spend as you wish. That is the ideal situation. – Sun Apr 1 '15 at 17:30

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