Debt
Reduction After Divorce
A recent poster on our
bulletin
board asked the question of how to reduce debts after a divorce. I can
certainly sympathize with what they were going through, having been there
myself. Divorce is such a stressful period already, and then to combine that
with the pressure of paying back debt can lead to severe frustration.
They were considering cashing out
and/or borrowing from their 401k but were open to suggestions. I will never
counsel anyone to cash out or borrow from their 401k unless there is
absolutely no other choice. Taking cash from a retirement plan typically
brings stiff early withdrawal penalties and is subject to taxes. While
borrowing from a 401k is better, you are still cheating yourself out of the
compounding interest that you could be earning during the time that it takes
you to pay it back. Also, you still feel the bondage of debt, only instead of
paying back your creditors you are paying back yourself.
Instead, some other methods of
reducing debt and cutting back on spending were suggested:
Start tracking your expenses
- The first thing that you are going to need to do is start tracking your
spending. Using a tool such as our Budget Planner
or even MS Money, Crown
Financial's tools, or other programs, start recording your spending
patterns to see if there are any areas where you can cut back on your
spending. By writing down where your money is going, it is much harder to be
in denial as to where you may be spending in excess.
Cut out excessive spending - Now that you've identified where your
money is going you can now start trimming the fat. Take a long, hard look at
your budget and see where you can possibly cut back. Believe it or not, you
can live without cable TV (if you get absolutely no reception where you live
and absolutely must have TV, settle for simply basic cable), cell phone
(unless your job dictates one, in that case use it ONLY for business),
excessive car payment (typically more than $200), moving into a smaller house
or apartment, and eating out (I would strongly suggest packing your lunch to
work and avoid eating out in the evenings). You may not have the life that
you're used to but you'll be saving tons of money.
Take on a part-time job -
Once you've trimmed your budget as far as it will go, take a look at what you
have left. If you are still in the red, you may want to consider getting a
second, part-time job in the evenings and/or on the weekends. By simply
working an 8 hour second job on Saturday's you could probably earn at least an
extra $50 per week. That's an extra $200 per month that you can use to pay
down debts!
Raise cash by selling - Is
there anything that you can sell for some extra cash? Comic book
collection? Golf clubs? Vacation house in the Bahamas? With access to eBay, it
is now easier than ever to get top dollar for things that you have around the
house.
Talk to your creditors - I
would also strongly suggest talking to your creditors and explaining the
situation to them and see if they would be willing to lower your interest
rates, cancel any late or overage fees, re-age your account, or all of the
above. If they think that you may be facing bankruptcy most of the time they
are more then willing to try to work with you.
Talk to a Credit Counseling
Agency - If your creditors are unwilling to deal with you directly, there
is no shame in going to a Credit Counseling
agency for help. They work directly with your creditors to get you lower
interest rates and reduce your payments. At Planabudget, we highly recommend
CCCS of Atlanta, however, most of the CCCS branches are very good as well.
