The recession has been tough on everyone. Even many of those who kept their jobs may have resorted to using credit cards and other lines of credit to offset salary cuts or pay for unexpected expenses.
If you've found yourself overextended with your credit, you may be tempted to liquidate your long-term savings, such as cash values on life insurance policies and your 401(k) or IRA accounts, to pay off debt. And then you might be able to pay off only part of your obligations.
Is it worth it?
Analyze the tradeoffs
"It really depends on the type of debt and if it will free up some cash each month," says Ryan Michler, registered representative for McPartland Group Financial Services in St. George, Utah. "Your goal is just not to eliminate debt, but to get cash flow once again."
For example, Michler says, if you are liquidating assets to put toward your home loan, but not paying it off, it will not free up extra cash since your payment amount doesn't change and will do nothing to improve your current financial situation.
"However, if it is an open line of credit or a revolving account and you're liquidating $50,000 to pay off a significant portion, say $80,000 in debt, then you are freeing cash and you can begin reducing the rest of the debt or saving again," he says.
Michler adds that strapped consumers should also consider these factors when deciding whether to liquidate assets to pay off debt: Take into account the tax consequences and penalties on 401(k) plan withdrawals for money distributed before the eligible age. Cashing in a large sum of money could bump you to another tax bracket. There could be surrender charges on life insurance. Cashing your life insurance could leave your dependents unprotected should something happen to you and you are not able to buy another policy. An unexpected deliveryGeorge Rapp hadn't had a raise in at least three years when his employer was bought out in 2008. After the buyout, Rapp, a manager in the technology industry in Columbus, Ohio, was asked to take a 10 percent pay cut, along with his co-workers."That in itself was survivable," says Rapp. His wife then experienced a difficult third pregnancy and after a couple of hospital stays, delivered the baby 14 weeks early in the spring of 2009. Medical bills quickly ate up the maximum on their health insurance, and there were child care expenses for their two older children while the Rapps stood vigil at the hospital. "The incidental expenses, such as eating out two or three times a day, made for a really expensive spring and summer," says Rapp. His wife, a contract employee working from home, lost her job. Next >Bankrate.com is the Web's leading aggregator of information on financial products including mortgages, credit cards, new and used automobile loans, money market accounts, certificates of deposit, checking and ATM fees, home equity loans and online banking fees. Visit Bankrate.com to get the tools and information that can help you make the best financial decisions.
