Advice on finances after divorce

[bcanddc]

OK, here's my situation, hopefully somebody can offer some creative advice.

I'll try to keep this short but it's a long story. Last October, my wife lost her job of 14 years and has remained unemployed to date. I am in the auto industry and it's no secret, we are struggling pretty badly. My income is off 50% year to date. Add to this, we are divorcing, unrelated to financial stresses. During the time she lost her job, we were using credit cards to keep us afloat so to speak. With what we had prior to her losing her job and what got added since, we owe about $55k.

We sold our home, luckily, and after everything, we ended up with $89k which she got all of as part of the divorce settlement in lieu of monthly support for 7.5 years at no less than $2k per month with the possibility of it going to as much as $5k once my income goes back up!! I thought I did OK there!

Enough back story, here's my problem. I have to pay off the $55k in credit card debt as part of the settlement, and soon too. I need a place to live and would prefer to buy since the market is down right now. I have $105,000.00 in my 401k. My 401k will not allow me to "cash out" anything, you can only borrow from it and pay it back monthly. Right now I am making $7k per month and that's not likely to change up or down for the next 6 to 8 months. Once it turns around, I'll be back up to like $10-12k per month.

What I'm trying to figure out is am I better off transferring the money to an IRA in my soon to be Xwife's name and cashing it out over there to pay the debt or trying to buy something and then quickly get a 2nd mtg on it to pay the credit cards off leaving my 401k intact? I know that option 2 is the best one for the long term retirement income but I'm worrying that the payments will get too high in the short term.....

In any case, I'm usually good at figuring all this stuff out but it's getting overwhelming and any advice from outside would be greatly appreciated.

[maat55]

I think you should start by renting something as cheap as possible. Then paying as much as possible toward the cards. After you can get some traction later you could look at buying a house.

[cptacek]

Don't transfer any money to your wife's IRA. That would be her money after you are divorced, right? I agree with maat...rent something, get back on your feet, and when the debt load is a little lighter, look into buying.

As far as borrowing somehow from the 401k, you can't borrow your way out of debt. That money would have to be payed back, and if you lose your job, you either have to pay it immediately or pay a hefty fine and tax on it.

[disneysteve]

I have to pay off the $55k in credit card debt as part of the settlement, and soon too. I need a place to live and would prefer to buy since the market is down right now. I have $105,000.00 in my 401k.

Some questions and thoughts:

1. Why such a rush to pay off the CCs? Does the divorce settlement specify that they must be repaid by a certain date? If so, when?

2. Buying a home should be the farthest thing from your mind right now. You are asking us how to repay 55K in debt and at the same time are talking about taking on probably 6-figures of new debt. Just doesn't make sense. Rent a room somewhere as cheaply as possible, live a bare bones lifestyle and throw every spare dollar at your debt. Once that is gone, you can start saving an emergency fund and eventually a downpayment for a house.

3. Don't touch the 401k unless absolutely necessary. Borrowing from a 401k is a lousy deal. You lose the growth and compounding of that money. You pay back pre-tax dollars with after-tax dollars. And you are at risk if you were to lose your job because you'd have to repay any outstanding balance right away.

[bcanddc]

Thanks everybody for your advice.

I do want to clarify a couple things though and see if that changes anybody's opinion.

I do have to pay off that debt in the next 60 days because the cards that it's on are in my ex-wife's name and for obvious reasons she wants those cleared out.

Secondly, I wasn't talking about borrwoing from my 401k. I know that moving the debt burden is not paying it off, it's just shifting it around. I was talking about cashing it out by moving the money to an IRA in her name that would allow a withdrawal.

Thirdly, my desire to purchase rather than rent is bourne out of two things. The first being I need the tax break afforded by the mortgage interest deduction and secondly if it takes me 3 years to pay that cc debt off (which I don't have), would not presumably anything I buy appreciate by more than the amount of the debt anyway?

Just a thought, tell me if I'm all wet and thanks again for all the advice.

[simpletron]

We sold our home, luckily, and after everything, we ended up with $89k which she got all of as part of the divorce settlement in lieu of monthly support for 7.5 years at no less than $2k per month with the possibility of it going to as much as $5k once my income goes back up!! I thought I did OK there!

I think you did very well here, giving up 45k now versus 180k min over the next 7.5 years. I dont know of anything that can generate a guarantee return of at least 300% over 7.5 years.

home prices are "low" right now, and it would be a good time to buy IF you have your finances in order. but if we use history as a guide, home prices aren't going to go up in the next 18 to 24 months and you will probably have to take a high interest rate or not qualify on a mortgage because of the large amount of credit card debit and lack of downpayment. if you qualify, the high interest rate will erode the savings from the low prices. so buying in 18 to 24 months will also be a good time to buy because home prices will be at about the same level with mortgage rates slightly higher, also you can get your finances in pretty good shape in that time.

my guess is the credit card debit is in joint accounts and has to be pay off before the divorce can be finalized, so to get the divorce finalized quickly, this would be my plan.
1. rent a cheap apartment, or move in with family
2. reduce unnesessary expenses
3. transfer the credit card debit to cards in your name only(maybe open some new 0% credit cards)
4. pay off the remaining amount in the joint accounts
5. pay off the debit you transfer and built up a downpayment
6. buy a house in about 24 months if you still want to
7. never tap 401k until retirement

in my opinion, loans against 401k and cashing out 401k/IRA are some of the worst financial moves people can make. with loans, you just elected for double taxation and with cashing out, there is penalties and higher taxes. also on top of that you put your future in jeopardy. in most states(i dont know if all) 401k/IRA survive bankrupty intact if you want to consider the worst case scenario.

another thing to think about is how much your tax situation has changed this year. no more mortgage interest deduction, single instead of married, ...proabably a lot more. your taxes are probably going up.

[disneysteve]

I do have to pay off that debt in the next 60 days

I just have to say that really sucks. You had to sell your home and give ALL of the proceeds to your ex and you only have 60 days to pay off $55,000 in credit card debt on an income of 7K/month. I don't know much about divorce settlements but that sounds horribly one-sided.

I need the tax break afforded by the mortgage interest deduction

As my accountant is fond of saying, you should never buy a tax deduction. It just isn't worth it. You are essentially spending $1.00 to save $0.25 on your taxes. So it still costs you $0.75.

would not presumably anything I buy appreciate by more than the amount of the debt anyway?

Haven't you been paying attention? Home prices are down, pretty sharply in some areas, and there is no expectation of a significant recovery anytime soon, especially in areas with depressed economies, which it sounds like yours is. People buying today will be lucky if their homes are still worth what they paid 3 years from now.

3. transfer the credit card debit to cards in your name only(maybe open some new 0% credit cards)

I like this idea a lot. That will satisfy the settlement terms and buy you time to get your life and finances back in order. It is an incredibly better option than cashing out your retirement plan.

By the way, you can't transfer your 401k assets to an IRA if you are still working for the company. Even if you could, you wouldn't be able to rollover YOUR 401k into HER IRA. Those assets are in your name and would need to stay in your name.

[LivingAlmostLarge]

Definitely open CC in your name and transfer the balance. Great if it's 0%, but if it's not, well it's better than a cashing out a 401k.

Now as to buying, if you are in the automotive industry, how do you even know you'll have a job in 1 year? Isn't that a very unstable industry to be in? Aren't they have massive problems with revamping and needing to redo their strategy in the US? Aren't many companies having layoffs?

If you had to already take a job with a lower salary, why are you so sure you'll be making 6 figures again soon?

I think buying a house is nuts. You have $55k in debt to pay off, no downpayment, no savings, nada.

yep you are all wet.

[disneysteve]

Definitely open CC in your name and transfer the balance. Great if it's 0%, but if it's not, well it's better than a cashing out a 401k.

Good point. Cashing out a 401k (which OP can't do anyway) you would pay a 10% penalty plus taxes - let's assume 25%. So you would lose 35% of the assets. Even if you got a credit card at 25%, you'd come out ahead.

[jIM_Ohio]

I like the open CC in your name and transfer the debt.

Depending on your budget, I think paying off in 10-15 months is possible. You listed monthly income of 7k per month. Can you allocate 4k per month to pay down debt, and live on 3k per month?

If you think you can, consider a 401k loan if term is paying off loan in less than 15 months. You lose flexibility with this option- if you lose your job, the remaining balance must be paid in full within 60 days (or similar). You cannot change your monthly payment with this option.

But it does solve the problem (pay off cc) and applies a specific time to the repayment. It also will increase 401k balance (because the 401k loan will charge you interest which you pay into your account). The advantage of doing this when the market is down is quite good- you will replenish money and buy more shares when market is down.

[Gailete]

I should certainly hope a single guy can find a way to live on $2-3000 a month! Use the rest to pay off those cards. All of this credit card debt is in your wife's name? None were joint cards that can have the usual payback time? When I got divorced from a charge-aholic the proceeds of the house sale managed to be enough to pay off the credit cards. Unfortunately he took his share and went out and bought a motorcycle instead of paying off the cards that were in his name alone. I don't think he has ever been out of huge debt in years. Needless to say, I know what starting all over from nothing feels like. You have to be willing though to to live within your means, and pay off your debts ASAP. If you put $4000 into those cc bills every month, you would have them paid off in less than a year and half. You would also learn how to live a more frugal life which sets you up for all sorts of wonderful things financially.