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Should I cash out my retirement account to pay bills?

When bills become overwhelming, frequently people turn to their retirement accounts for help.   Sometimes a large withdrawal from a retirement account can appear to be the solution to overwhelming debts.  However, it is usually a very bad idea to use retirement funds to pay off debts.  

Cashing Out Retirement Causes High Taxes and Penalties

Cashing out a portion of your retirement account to pay bills can result in higher tax liabilities and penalties.  You can lose up to 50% or more of your funds just through the additional taxes and penalties you will face.   This is a very inefficient way to deal with debt. 

Loans on a 401k or similar account create less problems than a withdrawal.  Loans on such accounts usually do not cause penalties or new tax liabilities to occur. However, 401k loans are still inefficient due to the interest that you must pay during the term of the loan.  These loans are usually not a sound way to deal with large amounts of debt.

Retirement Accounts are “Exempt” in Bankruptcy

In Indiana, most retirement accounts are exempt in bankruptcy.  This means that you get to keep all your retirement funds when you file bankruptcy.  Therefore, cashing out retirement funds can be an unnecessary loss.  If you are facing large debts, you should consider bankruptcy options before making a retirement account withdrawal.

Unfortunately, withdrawals from retirement accounts do not always rectify the entire financial situation.  Many people completely deplete their retirement savings only to find out that they still need to file bankruptcy only a few months later.   It is usually unwise to deplete retirement savings to pay debts. Speak to a bankruptcy attorney before deciding to withdrawal from your retirement accounts.  Such a withdrawal may be a financial mistake.  

Public Service Student Loan Forgiveness Law Change

Did the Public Service Student Loan Forgiveness Law Change?

Student in cap and gown

The first wave of 10-year faithful payers under the public service student loan forgiveness program (PSLF) will soon mature. These payers should have their loans forgiven under this program for their 10 years of work as a public employee. Now, it appears that the Department of Education is signaling that such generous loan forgiveness may never happen as promised.

The Public Service Loan Forgiveness Program (PSLF)

The U.S. Congress created PSLF through the College Cost Reduction and Access Act of 2007. To qualify, the participant was required to work for any qualified public or non-for-profit employment. In addition, they were required to make 120 on-time, monthly payments (10 years of payments). Upon completion, the student loan borrowers would be rewarded with the entirety of their student loans being “forgiven” under this law. At least, this was the story everyone participating was told. The way things are going it looks like the government may be going back on their word.

Signs That a Law Change to PSLF is Coming

U.S. Department of Education is taking legal steps to reduce the number of qualified recipients under the program. The Republican budget proposal also eliminates the funding for such a program. The U.S. Government is realizing that the cost of the program far exceed original expectations. Essentially, the government is not going to be able to afford the payouts required to indefinitely continue the PSLF program.

Will Anybody Receive the Promised PSLF Relief? Will They Retain the Full Balance of Their Loans?

Although it is too soon to be sure, doubts are arising as to whether the original participants in the program will receive any student loan forgiveness. The first wave of qualified participants should be in October of 2017. With dubious legal challenges as to who qualifies along with a lack of budget funding, many are getting nervous. If you are currently participating in the PSLF program, make sure to keep an eye on how the first wave of participants are treated. If you are intentionally working in the public sector due to this program, the defunding or eligibility shifting that may soon occur may force you to rethink your employment options.

Puerto Rico Bankruptcy

Puerto Rico Bankruptcy – What Does This Mean for the U.S.?

Puerto Rico Bankruptcy

Puerto Rico, a U.S. territory, has become completely bankrupt: it can no longer service its debts. Puerto Rico is barred technically from filing for bankruptcy due to its territory status. However, similar reorganization relief will be sought under PROMESA (the Puerto Rico Oversight, Management, and Economic Stability Act) that was passed by congress in 2016.

The magnitude of Puerto Rico’s “Bankruptcy” must first be put into perspective. Puerto Rico itself and many of its associated governmental and community based systems are now seeking bankruptcy-like relief. The debts associated with Puerto Rico’s bankruptcy alone reach over $70 billion. To put this in comparison, the infamous 2013 Detroit Chapter 9 bankruptcy was dealing with an estimated $19 billion debt load. Further back, the largest municipal bankruptcy had a debt load of approximately $4 billion during the Jefferson County, Alabama filing in 2011.

Municipal bankruptcies are rare – at least until now. The worrisome aspect that confronts the U.S. is that these municipal bankruptcies are growing. They are growing in size and debt load. Puerto Rico has a population of almost 3.5 million people. Detroit’s population was less than 20% of Puerto Rico at 680,000 people. This new Puerto Rico bankruptcy poses the question: will entire U.S. states be next?

Municipal bankruptcy is becoming a common concept. It is becoming normal and acceptable. As global debt systems begin to default on a wide scale, there may be no limits to what governments and states will fall into bankruptcy (or its equivalent). The dominoes of our overladen debt system will fall. It is not a question of if more will fall. It is a question of how many and in what manner.

The U.S. national debt is approximately $17 trillion. Much different than almost all other nations, the U.S. has only meager supplies of foreign exchange currency, gold, or other reserve methods. Although the U.S. currency is the primary world reserve currency, this arrangement to indefinitely perpetuate the unlimited spending of the U.S. cannot continue forever. Eventually, there must be some form of financial correction. Balance sheets can only be stretched so far even if everybody is playing on the same team. Eventually, it just deviates too far from reality.
Essentially, Puerto Rico’s bankruptcy may be the start of a long over due U.S. financial correction and reorganization. This reorganization may go from the bottom all the way to the top.

Loans vs Credit Cards- What You Need To Know

Loan vs Credit CardLoans and credit cards have many similarities. However, loans and credit cards do have distinct differences from each other.  Loans and credit cards differ in their terms and how they are repaid.

Loans are Predictable: They Do Not Change

Loan terms are definite. This means that the amount to repay, the interest rate terms, and the payment structure do not usually change.  A loan is usually set for repayment within a specific duration such three, five, or ten years of monthly payments.  The amount loaned does not change and the interest rate usually does not change (at least the interest rate stays within a rigid framework.)   

The framework of the loan is usually concrete and predictable. This should allow the borrower to make a solid budget for repaying the loan.  Loans are generally “safer” than credit cards because they are more predictable and do not change.

Credit Cards are Constantly Changing Lines of Credit

Although credit cards can be used responsibly, some dangers can arise because of their flexible and ever-changing nature.  Credit cards are ever-changing lines of credit. The amount owed constantly changes.  Therefore, the amount of interest charge is also constantly changing.

Balances can increase quickly on a credit card because there is no limit on the card’s use.  Credit cards can be used for anything. Traditional loans are usually used for a specific, singular purpose.  Credit cards can be dangerous. They can be used quickly to make up for lack of income or unexpected expenses. They can also be used irresponsibly to purchase items that would normally not fit into the monthly budget.

Another credit card danger is flexible terms.  Flexible terms can quickly destroy your financial situation. Credit cards frequently charge late fees and can increase the total interest rate at any time for a variety of reasons.  When the terms change on a credit card, the amount that you must repay monthly can drastically increase.  Such a raise in required credit card payments has forced countless people in the past to file for bankruptcy.

Conclusion: Stay Away From Both

Although credit cards are worse in some ways than traditional loans, it is best to stay away from both as much as possible. Credit cards and loans should be used responsibly.  They should only be used for practical and convenience purposes.  Credit cards and loans should never be used to purchase items you cannot afford. If you purchase items that you cannot afford with cash, you are putting yourself in jeopardy financially.  Make loans and credit cards work for you instead of the other way around.  They can be powerful tools if you use them only for convenience and investment purposes.