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While this may not work for everyone it is possible to renegotiate credit card balances and interest rates. For example, if you have credit cards at 19% interest or higher you could likely negotiate that down to 12% or at least 15%. This would result in lower credit card payments, which should help you get rid of that debt much quicker. You might also be able to negotiate a settlement for less than the balances on your credit cards by offering to make lump sum payments. You should shoot for probably 40% of your balances. The credit card issuers are often willing to settle a debt for a lump sum just to close out an account that's overdue or to get the money immediately instead of having to wait for months. Of course, there's a catch here, which is that your accounts must be pretty delinquent creditors will be willing to settle. In addition, your credit score will take a serious hit if you fail to pay your bills own time.
Borrow from your 401(k) to pay off debt
You could borrow from your 401(k) although there are some rules and regulations you would need to be aware of. And, of course, you will have to pay interest on the money but at least you'll be paying yourself instead of a credit card company. Financial advisors will tell you this should be your very last resort such as if you’re facing medical liens, bankruptcy or some other financial emergency. The downside to this is that you will have a less comfortable retirement if you fail to repay the money as you would miss out on the benefits of compounding interest. Also, your entire balance would become due immediately if you leave your job before repaying the money. And if you don't repay the money you would pay income tax on it as well as a 15% early withdrawal penalty if you're younger than age 59 1/2.
Here's a video from Fidelity that addresses the question of whether you should borrow from your 401(k).
Frequently Asked Questions about debt
Q. What debt does bankruptcy eliminate?
A. A chapter 7 bankruptcy, which is the type of bankruptcy most people choose, will eliminate most unsecured debts. This includes credit card debts, personal loans, personal lines of credit, payday loans and so forth. However, bankruptcy will not discharge secured debts such as your mortgage and auto loan nor will it discharge student loan debts, alimony, spousal support, family support and unpaid taxes.
Q. What debt can be consolidated?
A. Virtually all unsecured debts can be consolidated. This includes student loan debts and unpaid income taxes. As a general rule, you cannot consolidate secured debts such as the aforementioned mortgage and auto loans nor can you consolidate debts such as family support, child support and spousal support.
Q. Who regulates debt management companies?
A. Debt management and debt settlement companies are managed by the Federal Trade Commission (FTC). As an example of how this works, the FTC cracked down on the fraudulent debt settlement companies that had sprung up after the Great Recession by making it illegal for them to charge upfront fees.
Q. What debt to pay down first?
A. There are two schools of thought on this. The first is the Avalanche method where you first pay down the debt with the highest interest rate. The thinking behind this is that it will save you the most money. Alternately, there is the Snowball method where you would first pay off the debt with the lowest balance. The idea here is that you would pay it off fairly quickly, which would give you momentum to begin paying down the debt with the second lowest balance and so on.
Q. What debt-to-income ratio is good?
A. Is easy to determine your debt-to-income ratio. All that's required is to divide your total monthly payments into your gross monthly income. As an example of this if your gross monthly income was $4000 and your total monthly payments added up to $2000, your debt-to-income ratio would be 50%, which is way too high. A good debt to income ratio is 30% or less.
Q. Are debt reduction programs legitimate?
A. These programs are legitimate so long as they adhere to Federal Trade Commission regulations. The legitimate ones charge no upfront fees and have at least an A rating with the Better Business Bureau. They will also have a number of positive reviews online from actual customers.
Q. Who buys debt?
A. The most common debt buyers are attorneys and debt collection agencies. The attorneys that buy debt are those that specialize in debt collection so there is very little difference between them and debt collection agencies. Both will hassle you until you pay up and sue you if you don't.