Best way to get out of CC debt

[Hopscotch]

I’m a frequent poster but created a new profile for this question.

My DD was in a horrible accident last year and despite having good insurance, the bills have really piled up. My DH missed 2 months of work while she was in the hospital and I am a SAHM. We have never had credit card debt in our lives but now have about $30k in credit card and medical bills. I can’t go back to work as DD needs a significant amount of rehab. We have cut corners wherever we can but we need to do something to get this debt under control.

I am thinking we should take out a home equity loan. Our house is worth about 750k and we have good credit. DH is considering whether we should cash in some retirement funds (we’ve saved a lot for retirement) but most is qualified $$ so tax ramifications would be terrible. Any suggestions on getting this debt under control? I am constantly losing sleep over this as we’ve never been in this situation. We had a pretty large safety net for emergencies but that has dried up due to alll of her bills.

ETA: Little more info- we have no car payments and have about $550k in equity in our home. We also have quite a bit saved in college funds (about 300k) for our 3 kids and college is about 2 years out for the first one).

 

[firefly_ris]

I wouldn't pull from retirement, like you said the tax penalties would stink. Do you have any assets you can do without or get a cheaper version of like a vehicle, if you have payments?

I would recommend posting this same thing on Reddit in the personal finance sub, I read it frequently and there is some very solid advice to be had:

http://www.reddit.com/r/personalfinance

The equity loan could work since it will be lower interest than the credit debt but you might get some advice on how to "snowball" to eliminate all of it faster...

 

[ruadisneyfan2]

We have paid off a lot of debt by snowballing. It works.
I learned it from reading on Dave Ramsey’s website and watching his videos on youtube so it didn’t cost me anything to follow his advice.
It works by listing all debts in order of the amount. Start with the smallest debt. Pay min payments on all others while attacking the smallest with every bit you can spare.
When that is paid off, move onto the next smallest and add what was once the min payment of the first bill along with min payment of the 2nd bill.
As each bill gets paid off your min payment keeps growing, hence the name Snowball.

 

[Jen and Ashwin]

Good advice regarding snowballing. I also wanted to add that carefully tracking your spending helps a lot when trying to eliminate debt. I use YNAB.com to track all of our spending, set a budget and work towards goals. It helped us pay off all credit card debt, student loans, car payment, save $10k in an emergency fund and pay some expensive medical bills. It has been amazing for us.

 

[ruadisneyfan2]

Oh and before you start snowballing, keep $1000 set aside as an Emergency Fund. It’s not huge but often enough to cover unexpected surprise expenses such as a flat tire, vet bill, etc without resorting to charging on a cc.
Feel free to join us on the Debt Dumpers thread.

 

[ruadisneyfan2]

Good advice regarding snowballing. I also wanted to add that carefully tracking your spending helps a lot when trying to eliminate debt. I use YNAB.com to track all of our spending, set a budget and work towards goals. It helped us pay off all credit card debt, student loans, car payment, save $10k in an emergency fund and pay some expensive medical bills. It has been amazing for us.

 

[DisneyMandC]

Since you have good credit, I would look at trying to open a 0% interest credit card SOLELY for the purpose of transferring a balance from one of your high interest cards and paying it down. Obviously that card would only be for paying the debt down at a lower interest rate, and not new purchases, which it looks like you already know based on your lack of credit card debt in the past. The Chase Freedom card has 0% interest for 15 months. There may be better offers out there, I'm just not familiar with them. I would suggest looking into that before your interest accrues too much/any failure to pay your balance down damages your credit score.

I also suggest YNAB. DH and I use it and we have paid off one loan completely and track every purchase to see where our money is going. If nothing else, at least write down every purchase you make every month into categories so you can see where any money is going. It doesn't sound like you've had any issues overspending in the past, but at the very least this may help you see areas you can cut from.

Also, don't be afraid to call around to companies you regularly deal with and ask them to cut your bill down! I routinely call my tv, internet, and cell phone companies and tell them I'm not happy with my bill. Last time I did this I got $25 off each month between tv and phone bills. May not seem like a lot, but in 4 months that's an extra $100 you can throw at your credit card.

I'm so sorry about your DD's accident. I hope she continues to recover and that you all can get back to some normalcy.

 

[disorganizedchaos]

Like a previous poster said, meticulously tracking spending is a great way to save. We had a severe financial loss (income cut down to 1/3) almost four years ago and are only now recovering. Last month I really dove into our bills and expenses and already we're better off financially than we had been. If you have cash available you can ask the CC companies for payoff amounts. Many will settle for much less than you owe. You can also call utility companies, cable, etc. and try to work out a lower rate. Those small things really do add up and all the extra you save can go toward paying back the debt.

 

[Jennabeth]

Can you temporarily stop contributing to retirement? If it were me, I'd scale back on any 'optional' contributions (retirement or hsa) and use that money to put towards a debt snowball. This way you aren't taking on new debt (home equity) and aren't borrowing from your retirement. It sounds like you have a lot saved already and temporarily pausing it shouldn't hurt. Plus, that uncomfortable feeling you have while you aren't contributing might make you more focused on getting rid of the debt quickly.

 

[kymom99]

Don't take on new debt for the medical bills. If you call them and explain that you can't pay the bills in full they will usually put you on a payment plan. They don't charge interest or late fees if you set something up with them and make those minimum payments, at least they didn't at our hospital.

 

[1st*toright]

So sorry that you find yourself in this situation, and I'm glad to hear that your daughter is recovering.

I'll join @ruadisneyfan2 and @Jen and Ashwin in recommending YNAB, if you don't already have a serious budgeting system already in place. You mentioned you've been cutting corners, so you may have this all figured out already, but I was amazed at how much "extra" was flowing out in ways that weren't critical, even when I thought we were being fairly frugal. No matter what you do in the short term, you will need to have a plan to pay off whatever debt you incur.

I also think that the strategy of trying to set up payment plans with the hospital would be good, if you are talking about medical debt. If you have credit card debt that you incurred incidental to all of this, think about doing a balance transfer to a zero% card - only for the amount that you KNOW you can pay off within the zero percent time frame (and if you do YNAB, you should be able to accurately determine how much that will be). Once you get through that chunk, look for another zero percent card and repeat with another chunk of debt.

I had looked into a home equity line at one time, and was a little surprised at how expensive it was (interest rate was higher than I was expecting).

I also think that looking at ways to increase take-home pay is worth it - cutting back retirement contributions (but not so much that your husband misses out on a company matched amount, if there is any), double checking tax withholding, etc. to give you a little more cash to throw at the debt each month.

YNAB saved my bacon this year - DH lost his job and our household income was cut in half. I would not have thought that half our income could support our lifestyle, but we are still able to the things that are really important to us because we understand exactly where all our money goes and choose carefully how we spend. If I don't feel like cooking, we eat scrambled eggs for dinner - saves us $45 every time we don't get takeout.

It may be helpful to come up with a plan to pay off all the debt (say you want it gone in 30 months) then pretend that your income has been reduced by $1000 a month, then determine how you would cut that much spending from your life if you HAD to. Maybe that isn't doable, so you re-figure using 45 months instead.

Wish you the best!

 

[barkley]

I’m a frequent poster but created a new profile for this question.

My DD was in a horrible accident last year and despite having good insurance, the bills have really piled up. My DH missed 2 months of work while she was in the hospital and I am a SAHM. We have never had credit card debt in our lives but now have about $30k in credit card and medical bills. I can’t go back to work as DD needs a significant amount of rehab. We have cut corners wherever we can but we need to do something to get this debt under control.

I am thinking we should take out a home equity loan. Our house is worth about 750k and we have good credit. DH is considering whether we should cash in some retirement funds (we’ve saved a lot for retirement) but most is qualified $$ so tax ramifications would be terrible. Any suggestions on getting this debt under control? I am constantly losing sleep over this as we’ve never been in this situation. We had a pretty large safety net for emergencies but that has dried up due to alll of her bills.

ETA: Little more info- we have no car payments and have about $550k in equity in our home. We also have quite a bit saved in college funds (about 300k) for our 3 kids and college is about 2 years out for the first one).

cccs (consumer credit counseling services) is a very good FREE resource. they can sit down with you and look at your entire financial situation (including planning for any upcoming expenses related to your dd's continued rehab care). if both you and they decide that their programs would work for you they can potentially lower the interest rate you are being charged and structure a repayment plan that can be achieved within 3-5 years (that's the goal for their programs). they are NOT a loan company and for the most part all of their services are free.

now if I were in your situation (and I was in one somewhat similar some years back due to my own illness)-I would look to see how that college fund is set up. if it's in some kind of account that can be drawn from for non educational purposes w/no penalty then I would consider using it BUT FIRST-I would contact the medical providers where you have debt and speak to their payment department. don't tell them about all your assets but ask if you could 'manage' to pay the entire debt IN FULL would you be able to get any sort of discount. many providers offer discounts (one of our locals reduces by at minimum 10% for payment in full, and some have financial assistance programs to reduce or eliminate charges but those are based on income/assets).

my reasoning on using the college savings is b/c taking a home equity loan just shifts the debt to another place so you'll still be paying out more money each month AND the new tax law is written such that you won't be able to write that interest off b/c the proceeds of the loan wouldn't be going to 'buy, build or substantially improve' a home. if the college money is available w/o penalty it's only removing 10% of it-and you've got 2 years before your first one even starts, so let's say 6-7 years before that one graduates to work on building that fund back up (and realistically you've got to start rebuilding your 'safety net' and determining a new household budget factoring in new expenses related to your dd's rehabilitation before you continue funding that college fund anyway).

best of luck to you. I really encourage you to call the cccs in your area-they are great people to work with.

 

[WALTSAGOD]

Read anything by Dave Ramsey

 

[TwoMisfits]

I’m a frequent poster but created a new profile for this question.

My DD was in a horrible accident last year and despite having good insurance, the bills have really piled up. My DH missed 2 months of work while she was in the hospital and I am a SAHM. We have never had credit card debt in our lives but now have about $30k in credit card and medical bills. I can’t go back to work as DD needs a significant amount of rehab. We have cut corners wherever we can but we need to do something to get this debt under control.

I am thinking we should take out a home equity loan. Our house is worth about 750k and we have good credit. DH is considering whether we should cash in some retirement funds (we’ve saved a lot for retirement) but most is qualified $$ so tax ramifications would be terrible. Any suggestions on getting this debt under control? I am constantly losing sleep over this as we’ve never been in this situation. We had a pretty large safety net for emergencies but that has dried up due to alll of her bills.

ETA: Little more info- we have no car payments and have about $550k in equity in our home. We also have quite a bit saved in college funds (about 300k) for our 3 kids and college is about 2 years out for the first one).

Okay, so if you have $550K in equity and $300K in college funds, you're probably talking a 6 figure income and significant retirement savings, too...so let's use it.

If it were me, and I had significant ROTH IRAs, I would take the principal from the Roths (1/2 from mom and 1/2 from dad) to pay this off. You can withdraw principal at any time tax and penalty-free...you just can't put it back. But, if you have a final "handle" on this issue and a final number you need to get out from this, use the assets you have. You can't earn 27% in one year, and if you keep this on CCs, that's the kinda penalty you are taking every year. So, stop taking it.

I know this seems counter-intuitive, but it is the "free-est" money you have if you've burned through your emergency savings...and the market's at a pretty high point, so it's not even the worst timing.

Once you do this, you should spend the next few years MAXing all your retirement avenues, even if you have to put the college funds on the back burner. Since you have 4 years of state school + board saved, you have done your kids right...so make sure you do yourselves right, too...

 

[DLgal]

You seem to be in a good position overall financially. $30k of debt isn't that bad considering your assets. You have a huge amount saved for college IMO, so I would drop down those contributions to the minimum monthly required. I wouldn't stop or change retirement contributions though. Your kids can always get loans to help with college if necessary, but you can't get loans for retirement.

You can likely cut spending down from where you are at. Most people spend more than they HAVE to every month so look closely at your spending and try and find things you can cut back on. Food is most people's largest expense so start there.

Considering the equity in your home can you refinance your mortgage and lower your monthly payments there?

A HELOC might be an option depending on the rate you can get but I wouldn't go there just yet. The advice to open credit cards with 0% offers is a good one. Open one on your name and have your husbnad do the same. Split the debt evenly and try and pay as much off as possible in the 0% offer period. Then, if there is any remaining, swap the money by doing another interest free transfer (you transfer the debt from your husband's card, and vice versa). To make this work you will need the 2credit cards to be issued by different banks. This way, you will pay off your debt only paying the minimal balance transfer fees (between 1-3% usually.) I do this all the time. I move balances around using 0% balance transfer offers until I pay off the debt. I always get the transfers for a 1% fee.

 

[DLgal]

If it were me, and I had significant ROTH IRAs, I would take the principal from the Roths (1/2 from mom and 1/2 from dad) to pay this off. You can withdraw principal at any time tax and penalty-free...you just can't put it back. But, if you have a final "handle" on this issue and a final number you need to get out from this, use the assets you have. You can't earn 27% in one year, and if you keep this on CCs, that's the kinda penalty you are taking every year. So, stop taking it.
..

You CAN put money that you withdraw from a Roth IRA back! There is a time limit though. We had to borrow $7500 from my Roth IRA a couple years ago when we moved (needed money for security deposit and first month rent). I was able to withdraw $7500 worth of contributions and put it back without penalty. You have to put the money back in the same "contribution year" you take it out, which for Roths is April-April.

You can ONLY do this with Roths, though. The OP said the retirement accounts are "qualified" which usually means 401k or Traditional IRA. So, they can't withdraw anything without penalty.

 

[michbaron]

I would definitely recommend Dave Ramsey like some others have said and he doesn’t recommend borrowing from your retirement and would discourage you from using a home equity loan too, his book is a quick read, like finish it in a day quick and your library should probably have it, maybe just give it a read before making any big decisions... I hope your daughter is doing okay

 

[Darcy03231]

Sorry to hear about your daughter's accident. It just goes to show how much something can change in an instant. Hopefully she's on the road to recovery now.

First, I wouldn't trade unsecured debt (credit cards) for secured debt (home equity loan).

Second, I would temporarily stop contributing to both your retirement and college savings to free up some cash.

Third, go through your monthly income/expenses with a fine tooth comb. For two weeks write down everything you spend. You'd be surprised at how much just "dribbles" out without you noticing. Then put everyone in the house on a debt diet. Some people find putting cash in envelopes based on their budget works well. When the cash is gone your spending for the week is done.

Fourth, I know you said you're a SAHM parent and need to continue to be one due to your daughter's recovery, but is there anyway you could work part-time temporarily nights and/or weekends when your husband is home?

Fifth, the snowball method works.

 

[imbatman]

I’m a frequent poster but created a new profile for this question..

You're among friends here. See my name and pic? This is the alt name I created at the beginning of the year when I found several thousands of dollars charged without my knowledge. Most of these people are helpful and nearly all are encouraging. Staring at debt is scary when you're not used to it. But get ready for lots of advice and plenty of hugs from this board. I've found that there are so many different approaches, depending on you and your lifestyle. But moving forward, even in baby steps, is what you have to do.

Guess what? With lots of time and effort, as of tomorrow, the debt that I created this alt for will be paid off! I check in here a lot, especially when I look at the numbers and get discouraged. It's not fun to scrimp.

But...you have your DD, who is hopefully on the mend. You have a DH who is working. You have a house. And now...lots and LOTS of advice.

Keep checking in with us! We will send you hugs and prayers and smilies from the board.

 

[katie111]

OP HERE. Thank you so much for all of your suggestions.

Here's what I have gotten done so far today.

I signed up a for an Amex CC with 0% interest for 15 months and zero charge for balance transfers. I transferred $7000 in CC debt over to that card from my high interest SW card. Thinking we will either open another zero interest card to move more CC debt to (Amex maxes out at $7500 allowed for balance transfers) or we may just start snowballing the one with the high interest rate.

I called the hospital and set up a payment plan for my bills there. They were not able to lower any bills but at least they are now at a manageable monthly amount.

I got the Dave Ramsey book out of the library (normally I would have just ordered it from Amazon, but trying to be frugal here!).

Really appreciate all the suggestions and would love any additional ones anyone has. Gong to look at them more indepthly over the next couple of days. Have a long way to go but at least I feel like I made a dent in it today.

One thing to clarify is that we are not currently contributing to the college funds. Most of that $$ we accumulated when the kids were really young and we had saved a lot even before they were born.