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rko2,

You wrote, I've been unemployed for almost 6 mos this round. It's the 2nd time in 4 yrs. To say I'm scared doesn't even come close to what I'm going through. The debts are high and the savings gone and still no job insight... now what?

I have a 401K plan that is worth about $10-15K and I have a credit card that has a limit of $15K I can get cash from. There is nothing on the CC right now. Which do I use as I need monies?


You didn't really tell us enough about your situation; but let me give you my opinion. Use the credit card.

Actually, I'd consider opening another credit card too, if I could find one with a 0%BT offer. This could give you an extra 2-4 months of breathing room and anywhere from 6-12 months to repay the loan before interest starts to acrue.

It's unlikely that you can borrow from your 401(k) because you're unemployed. Most plans only offer that feature to current employees. That means, you're considering cashing out some or all of your 401(k). Try to avoid that.

Your 401(k) can't be touched if you wind up in bankruptcy because of your stint of unemployment. Usually when people consider cashing out their 401(k), they're not really fixing their problems with income or expense. Instead, they're just deferring the problem and blowing their retirement funds in the process. If your unemployment does eventually result in bankruptcy, cashing in your 401(k) will have been for nothing because your creditors will have taken it all.

Also, if you cash-out your 401(k), you'll pay taxes and penalties on the money. On the flip-side, the taxes you pay by cashing out may be somewhat lessened by your 6 months of unemployment. But I would still want to avoid paying the penalties.

While you're unemployed, try to keep your payments on your debts current for as long as possible. Of course, that means cutting your expenses as deeply as you dare. But it is also probably wise to borrow money to continue making your minimum payments rather than letting your credit score suffer. Once you start missing payments, the cost of all your revolving debt will rise precipitously. To this end, you probably need to explore cheaper ways to borrow cash from your credit cards, since cash advances are notoriously expensive.

So, given that I know next to nothing about your situation, I'd recommend that you borrow from your credit cards before you consider cashing out your 401(k). Personally, I would only consider dipping into a 401(k) in order to save a house from foreclosure. Of course, if things were that desperate, I'd also consider selling the house so I could get as much of my equity as I could out of it.

BTW: Many states offer special bankruptcy protection for your primary residence, if you own it. But in order to qualify, you must keep your mortgage current. That means you need to continue making payments on your mortgage, even if that means you have to flip hamburgers to help make the payments.

Finally, take my advice with a big grain of salt. I've no real first-hand experience with being unemployed. I was laid-off once 10 years ago; but I was unemployed for all of 3 weeks. My severance covered 9 weeks and I actually did some contracting work during that period for a friend that had his own business. So, I guess it's been 20 years since I didn't have a paycheck; and for a few months I've had two.

- Joel
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