August 19th, 2014 7:21 AM by Jackie A. Graves, President
all options to pay off debt are good ones.
considering methods like obtaining a home equity
loan or an increased line of credit, cashing out
your 401(k), and cash payday advances, you should realize these are simply
quick fixes that will increase your total debt and financial risks.
the wrong approaches to reducing your debt will help steer you in the direction
of the right ones.
Don’t Leverage Your Home to Get Out of Debt
equity lines of credit, or HELOCs, are good for things like home repairs and updates.
But if you use them to reduce a heavy debt, you are putting your home at risk
since you are putting it up as collateral.
ultimate loss of your home in foreclosure makes this too risky a path to take.
You can’t plan for the future—things like divorce, illness (particularly the
medical bills that follow), job loss or other unforeseen events can drain your
that happens when you are using a HELOC, you might not be able to pay it back:
debt is better than homelessness.
Don’t Increase Your Line of Credit
a bank or credit card company to increase your line of credit often results in
greater debt and less attainable payoffs, especially since the interest rate
will likely increase as the line of credit is extended.
taking on more credit—and more debt—is better than leveraging your home, it’s
still a way to bury yourself in more unpaid bills.
Don’t Take Route 401(k)
if you are eligible to take money out of a 401(k) plan, you will be required to
pay federal taxes on it when you do so.
you take a loan out on your 401(k), you can be taxed on the money as
income when you receive the loan—and then again later when you withdraw the
money for retirement. Being taxed twice is never a sound financial move.
is better to let the 401(k) sit and earn interest rather than cost you loan
interest or tax dollars. Save it for your retirement.
Don’t Get Cash and Payday Advances
and payday advances should be for emergencies only—not to handle debts. The
payday advance can carry an even larger interest rate than those attached to
your debts, sometimes astronomically.
cash advance puts money in your hand, but ultimately, it only increases your
total debt. You’ll be subjected to minimum fees and percentage
unpredictable events can harm the payoff of these added debts as well as
the original debt you may have sought these advances to cover.
the Bankruptcy Option
should only be considered as an option when all other paths have failed, as it
will seriously hinder your
ability to get a loan for a while. For example,
you shouldn’t even consider applying for a mortgage for two years after your
bankruptcy has been discharged.
you are considering bankruptcy, seek proper credit and bankruptcy counseling
before filing. There are several different forms of bankruptcy to
consider, and a counselor can advise you as to which best fits your
is a legal proceeding with specific consequences. You need an attorney to handle
the details of a bankruptcy.
Expenses, Budget Better, Reduce Debt
can’t get in incredible shape by going to the gym for just one day, one week or
even one month. Likewise, you can’t get in good financial shape if you don’t budget
accordingly until your debts are paid.
best way to do this is to create a long-term budget and stick to it. Involve
your family, go over expenses and see what you can do without.
takes discipline, but it’s the best way—for while there’s no quick fix to
getting out of debt, you can eliminate it over time.
By: Craig Donofrio Updated from an earlier version by
Frank Alan Herch.
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