Author Topic: Debt repayment Plan.  (Read 4143 times)

UnleashHell

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Debt repayment Plan.
« on: August 31, 2014, 11:37:48 AM »
Ok - heres the situation.
Debts.
Credit cards 22k
IRS 25K
loan from work 401k 46K
total 93K

Assets:
House - 175K
401k $105K
IRA $140
Wife's 401K  15K

net $260K plus a mortgage free house.

Clearly the Credit cards are the priority.
card a)  650
Card b) 6,500 @13%
card c) 8,400 @ 23%
card d) 3,400 @22%
Card e) 3,000 @ 0% until Sept 2015

after paying back the pension loan we have a net income between us of about 5,500 am month. the budget has been worked out and I think we can have about 3k a month to put towards repayments of various debts.


I also have shares that I can sell and free up a further 7,500K

The simple option would be to sell the shares and then chunk everything towards the cards. however I have a plan that could maximize an opportunity here and I'd like some thoughts, feedback and pointing out where I'm going wrong! 
Just as a note the IRS is getting 500 a month and charging 3% on the balance.
The pension loan is a loan from myself and is charged at 3.5% - to myself!

Plan-
credit card a) - just pay that first - one less to deal with
then sell shares and pay the 6,500 on credit card b
pay 1,000 off credit card c and transfer the balance to credit card b at 0% for 12 months (3% transfer fee).
We can then raise enough to pay off credit card d)

by the end of October we then have just over 10k in balances at 0%

I then want to turn my attention to the IRS loan - however theres a small caveat to this. Any tax refund I get would be offset against the amount I owe them.
So why not put as much as we can into our 401K's and IRA. most of it - if not all - would be tax free. By using our post tax income to boost the amount invested there we would then generate a tax credit to apply against the amount we owe the IRS.

I'd like to throw as much in there now to get the max from this tax years advantage.
then early next year throw the first few months into normal saving so we have enough to cover the Cards when they are payable, then switch back to focusing on the IRS loan.


Does this seem like a feasible strategy? Why wouldn't I use the tax free amounts that I'm not currently using to offset against the amount I owe while increasing our savings?

additional questions then arise - as in how much can I add?
 what are the limits?
 is there a problem in putting it all in my IRA instead of the 401K?
 is it worth setting an IRA up for the wife (I have no idea how her money is allocated in her 401K - I'd rather it went to an IRA though)

Is there something blindingly obvious that I've missed?











TheSimpleLife

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Re: Debt repayment Plan.
« Reply #1 on: August 31, 2014, 12:19:09 PM »
Obviously without more detailed personal financial information, it is hard to give precise advice.  But, based on what you've described, this would be what I would do:

Refi house to pull cash out = $175K x 80% LTV = $136 less closing costs and expenses  = $133K of cash

With that money, I'd pay back all $93K.  I'd also fully max both 401(k)s for 2014, and fund Traditional IRAs for both you and the wife if you have the money for the rest of the year (based on your numbers, should easily be able to cash flow this).

Based on monthly expenses of $2,500, I'd personally set aside 3 months of expenses for a small emergency fund.  Some recommend way more, but I'm comfortable with that amount as I'm sure I could replace my income if absolutely necessary very quickly.

Bigger questions in my mind:  What is causing the CC debt?  Is the IRS debt a self-employment tax issue?

In other words, it sounds like emotional spending could be causing many of the debt issues.

Good luck.

UnleashHell

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Re: Debt repayment Plan.
« Reply #2 on: August 31, 2014, 12:30:04 PM »
I do have $7,500 in shares that is the emergency funds but given the interest rates on the cards I want to remove then.
Credits cards - current spending was purchases to renovate the house - plus all the travel and expense involved to return to the UK for a family wedding (unavoidable - first family wedding for eons and my in-laws are unable to travel so we have to take the kids to them).
certainly was poor planning and decisions previously - was dealing with it aggressively when I lost my job and found another one 1,500 miles away. Lost the house so no chance of a refi here. IRS was the bill on using some of the pension to purchase the house (25k in irs plus a loan from myself of 50K vs 18K a year in rent. no brainer for me to own).

if I didn't have the short sale then your suggestion would probably work. I have to be a little more devious/ max out my opportunities...

LadyStache

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Re: Debt repayment Plan.
« Reply #3 on: August 31, 2014, 12:43:04 PM »
Confusion over the house

Ok - heres the situation.
Debts.
Credit cards 22k
IRS 25K
loan from work 401k 46K
total 93K

Assets:
House - 175K
401k $105K
IRA $140
Wife's 401K  15K

net $260K plus a mortgage free house.

Lost the house so no chance of a refi here. IRS was the bill on using some of the pension to purchase the house (25k in irs plus a loan from myself of 50K vs 18K a year in rent. no brainer for me to own).

if I didn't have the short sale then your suggestion would probably work. I have to be a little more devious/ max out my opportunities...

So you listed the house as an asset with no mortgage. But you lost it? And you're doing a short sale? Please explain.

UnleashHell

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Re: Debt repayment Plan.
« Reply #4 on: August 31, 2014, 12:52:53 PM »
The previous House I lived in was sold as a short sale.
The current house is mortgage free and will stay like that.
HELOC's and Mortgages are off the table for me due to the short sale.

I have to deal with what I have in front of me based on current earnings.

Catbert

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Re: Debt repayment Plan.
« Reply #5 on: August 31, 2014, 02:09:00 PM »
I would avoid selling the stock which is just going to give you more of a tax bill.

I would pay off CC a and d, first.  Then c, b and e.  Along the way do whatever 0% transfers that you can and re-sort order as appropriate.  Then hit the 401k loan.   

Save the IRS for last as long was you know "for sure" that you can continue to pay them as promised. It makes no sense to me to up your 401k contribution while slowly paying off the401k loan to avoid the IRS applying your refund to what you owe them.  If you know you'll get a large refund adjust your withholding now and apply to paying your debts.

UnleashHell

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Re: Debt repayment Plan.
« Reply #6 on: August 31, 2014, 02:18:15 PM »
I was thinking along those line Mary W

but if I up my 401k contribution - or better still the IRA  - with after tax dollars then the tax benefit from that moves accelerates the IRS payment without it hitting my budget.
seems like free money if I do it right (OK I don't see the money just reduce the liability but that's fine as that is where I need to be).


frugaliknowit

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Re: Debt repayment Plan.
« Reply #7 on: August 31, 2014, 02:23:49 PM »
You have a great net worth, but the structure is all wrong. 

Your thinking about your 401K is flawed.  401K's are tax DEFERRED.  They are not a tax BREAK.  You are "deep in the soup".  Stop all unmatched 401k contributions.

Attack the cc's in order based on the highest rate (minmums on the lower rate, as much as possible on the highest rate).  Work your way down (in rate) until they are paid off.  Don't do balance transfers.

Then attack the rest based on rate.  Build an emergency fund.  Stocks are not an emergency fund.

Cassie

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Re: Debt repayment Plan.
« Reply #8 on: August 31, 2014, 02:45:08 PM »
CC's are unsecured debt and even if you were able to refi to get a mortgage loan it would not be smart because you would turn it into secured debt.  Glad you are sticking to your guns about the house.  I would pay off the $650.00 card to get it off your plate & then start paying the cards with the highest interest rate.

Catbert

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Re: Debt repayment Plan.
« Reply #9 on: August 31, 2014, 02:51:23 PM »
I was thinking along those line Mary W

but if I up my 401k contribution - or better still the IRA  - with after tax dollars then the tax benefit from that moves accelerates the IRS payment without it hitting my budget.
seems like free money if I do it right (OK I don't see the money just reduce the liability but that's fine as that is where I need to be).

If you up your 401k contribution to save on taxes then you're losing money out of your budget to pay off your CC and 401k loan.  I think your hair-on-fire-debt should be a priority over upping 401k or IRA contributions.