Get With The Plan: June 16, 2013

61613Jeff and David are a same-sex married couple facing the toughest financial time they’ve ever had. David was just laid off, so they’re relying on Jeff’s income alone.

But they worry that isn’t enough to pay the bills, including $41,900 of credit card debt and $86,700 in student loans.

“We’ve taken the steps we think we can take, short of bankruptcy,” says Jeff, 33. “We’ve refinanced our mortgage down to a 3.5 percent interest rate loan. We’ve cut household expenses. We’ve looked into taking out a home equity loan to consolidate some of the debt, but we lost all of our equity when the market collapsed and took 30 percent of our home’s value with it.”

David, 35, is looking for work, and he hasn’t started receiving unemployment benefits.

“I don’t want to go the bankruptcy route because my credit is very good and I feel morally obligated to pay back what I’ve spent,” says Jeff. “We aren’t in default, and I continue making monthly payments on everything, but I feel like I’m drowning.”

The couple, whose names have been changed, have $93,400 in 401(k) plans, $5,500 in IRAs, $1,800 in savings and $1,500 in checking.

The Star-Ledger asked Brian Kazanchy, a certified financial planner with RegentAtlantic Capital in Morristown, to help this couple find a way out.

“They need a short-term plan to alleviate the pressures of a large debt burden while one of them looks for a new job,” Kazanchy says. “They also need a long-term plan to improve their financial stability and save for retirement once this individual is back to work.”

Looking at the couple’s balance sheet, Kazanchy says their net worth has gone negative.

First, a look at their underwater home.

Their home is valued at approximately $290,000 and their mortgage balance is $314,000.

“Home prices are recovering and they continue to pay their mortgage, so the combined impact of these two forces will resolve the problem and get them back into positive equity over time,” he says. “They have an excellent interest rate of 3.5 percent on the mortgage that they will want to maintain. No changes are recommended.”

The next largest debt is student loans of $86,700. Kazanchy says they will have to pay this down over time, but the monthly payments are reasonable and the 6.4 percent interest rate is “decent.”

Kazanchy recommends they continue to make the minimum payments every month.

The $41,900 from credit cards is a major concern, he says, with interest rates that will range from 10.9 to 17.99 percent across their 10 credit cards once the remaining zero percent financing deals expire.

Kazanchy says because they don’t have equity in their home, they can’t borrow against it to pay off the credit cards.

The next area to look is their 401(k) plans. He says they should contact their plan providers to find out the terms and eligibility for taking a loan against their 401(k) plans. They have $93,400 in these plans and may be able to borrow up to 50 percent of their balance.

Kazanchy says the benefits of swapping credit card debt for 401(k) loans are twofold.

“First, the interest rates will be much lower, and secondly they will be borrowing money from themselves and paying themselves back rather than paying interest to the credit card company,” he says. “A final alternative consideration would be a loan from a family member to help pay off their credit cards, but this is not always available for many individuals.”

Looking at the couple’s expenses, Kazanchy says Jeff’s income can just about cover their expenses, but the credit card and student loan payments account for about half of their personal expenses. He says they have already tightened their belts to the max just to tread water.

“If they are able eliminate the credit card debt through 401(k) loans, they can allow for some breathing room since the interest on the 401(k) loans will be much less and the loans can be amortized over five years,” he says.

And when David starts receiving unemployment benefits, it will help their cash flow needs in the short-term.

When the credit cards are paid off, Jeff and David should try to build up a cash buffer, ideally a cash reserve of three to six months of living expenses.

Longer term, Kazanchy says, it will be crucial for David to obtain employment and for both spouses to be diligent with their budget to make sure they don’t run up large credit card balances again.

“The home mortgage, student loans and even the newly recommended 401(k) loans can be paid off gradually as they work towards a better fiscal position,” Kazanchy says. “However, credit card debt with such high interest rates is a dangerous proposition that needs to be avoided.”

Kazanchy says he’s confident a better financial health will develop for them if they live within their means.

Looking longer-term, he says they should be sure to contribute enough to their employer retirement plans to take advantage of the company match, and potentially contribute beyond this amount up to the personal maximum each year once cash flow allows.

He recommends a 20 percent bond and 80 percent stock allocation for retirement savings.

“Jeff and David have a long time horizon and will want to maximize the potential growth of their portfolio assets,” Kazanchy says.

Additionally, they should have $1 million of umbrella liability coverage on top of their auto and homeowner’s insurance policies.

They should also make sure they have wills, health care proxies and durable powers of attorney to ensure that their assets are handled according to their wishes if anything were to happen to one or both of them, he says.