Raising Cash to Pay Debt: Risks and Rewards

May 1, 2012
By Karen Lawson

Thanks to the struggling economy, many families are finding themselves in situations they never thought possible. Mounting credit card debt, long term unemployment, loss of health care benefits and underwater mortgages are among the financial calamities.

Reducing high-cost credit card debt can be a good first step toward financial recovery for families in distress. While borrowing money for credit card consolidation can help with streamlining debt management, this option still leaves you in debt. Here are a couple of ideas for raising cash instead to pay off your credit card bills:

Garage sales and online auctions. Cleaning up small balances can be accomplished by cleaning out your garage, storage locker or attic. The upsides to selling things you no longer use include clearing space in your home, as well as gaining space on your credit lines. The downside is the time spent sorting, tagging and conducting garage sales or preparing auction listings, and don’t forget to include the cost of auction fees, mailing materials and postage from your earnings.

Borrowing against your 401(k) retirement savings. If you want to pay off a lot of credit card debt and need to raise a significant amount of cash, ask your employer’s human resources department about taking a loan against your 401(k) account. Borrowing against your account does not count as a withdrawal and does not incur IRS penalties unless you fail to repay the loan. Discussing the pros and cons of a 401(k) loan with a tax advisor can help you determine whether this option is for you.

Cashing out annuities or structured legal settlements. Advertisements may compel you to cash out your annuity or structured legal settlement as a lump sum payout in lieu of installment payments. But while this sounds like a simple debt relief solution, what the ads don’t mention is the cost such companies charge for making lump-sum payouts, so weigh these costs carefully before choosing this option.

It can be tempting to seize any source of cash you can find during tough times, but compare the options available and their associated expenses carefully before you choose one.

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