Repay ‘Charged Off’ Debt Sold to a Collection Agency?

I have a charge-off on my credit report because of a bankruptcy five years ago. If the company that wrote it off sells the debt to a collection agency, do I need to pay? The damage is done now. It’s been on the report since the bankruptcy. I’m rebuilding and financially things have turned around again. Do I need to pay the collection agency? Thank you.
Stan

Like many people, Stan has had some problems with debt. And he’s not sure what his responsibilities and rights are. Let’s see if we can’t help him make sense of the situation. To begin, we’ll want to explore some underlying concepts. Once we understand them, we’ll be better able to answer Stan’s question.

The first concept to explore is the debt itself. As we all know, a debt is money that you’ve agreed to pay someone in the future, either to a person or a company. Chances are that they gave us money or products now in return for our promise to pay later. We probably agreed to pay interest on the money we owe. Most often, we also signed a credit card or installment loan agreement, which legally defined our responsibilities.

Sometimes a collection agency will buy a group of debts from the company that issued them. If our debt was among them, we no longer owe money to Company A, but now we owe the collection agency. But that does not affect the amount owed, the interest rate or any penalties that apply.

Next, let’s learn about a “charge-off” or “write-off.” The two terms refer to the same accounting procedure. At some point the lender decides that they’re unable to collect a debt. They’ll remove it from their accounts receivable. That affects their profitability and taxes, but it does not effect whether the debtor owes money to the company. A charged-off debt is still a valid debt. So even though our debt was charged-off, we’re still obligated to repay it.

Stan mentions that he’s been through a bankruptcy. He doesn’t say, but we’ll assume that it was Chapter 7 proceeding. This is the simplest and most commonly sought bankruptcy. People apply for bankruptcy to get a fresh financial start. They’re asking the court to rule that they are unable repay what they owe and to release them from some or all of their financial obligations.

Officially a bankruptcy “discharges” debts. What that means is that a debt included in the bankruptcy is no longer a debt. It is as if the debtor doesn’t owe the money any more. He is no longer required by law to repay the debt. Further, the bankruptcy order requires that the lender take no further action to try to collect it. That would include hiring lawyers or contacting the debtor via mail or phone. Unless there is legal action involving the discharge, it happens automatically with the bankruptcy.

Not all debts are automatically included in a bankruptcy. The debtor may choose to exclude some debts from the bankruptcy petition. Perhaps debts owed to family members. Other debts are not eligible for protection, such as taxes, alimony and child support. It should be clear at the time of the bankruptcy filing what debts are included and which are not. Debts not included in the bankruptcy are still owed, just like they were before.

Finally, we need to understand the basics of credit scoring. 35% of the score is based on payment history. So when Stan was late with his payments, that reduced his score. When the account was turned over to a collection agency, that also lowered the score. And, finally, the bankruptcy and discharge would also effect his score.

Now that we understand the process, let’s look at Stan’s question. He’s correct that the bankruptcy closed certain accounts. If the account he’s asking about was included in the bankruptcy, it is discharged. Stan should inform anyone attempting to collect that it has been discharged. And, that further attempts to collect it would require him to contact the court informing them of the attempt.

If Stan chooses, he can voluntarily repay a discharged debt, but he’s under no legal obligation. Credit reporting agencies won’t reveal exactly how they compute credit scores. But, it’s unlikely that repaying a discharged debt years after the fact would have much impact on his score.

The bankruptcy will appear on Stan’s credit report for 10 years. At this point, his best method for rebuilding his score is to show that he’s used credit responsibly since the bankruptcy. It appears that he’s spent the last five years doing just that. As long as the debt was included in the bankruptcy, he should be able to ignore any attempts at collection without fear of hurting his credit score.

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This article by Gary Foreman first appeared on The Dollar Stretcher and was distributed by the Personal Finance Syndication Network.


Please don’t get your cancer treatments in a bar.

We’ve warned people for years not to trust the wild health claims that some companies make about their pills, powders, and potions. Call us old fashioned, but we almost fell off our stool when we heard about a company that ginned up some health claims for “cocktails” that go through the arm and not down the hatch. What are we talking about? We know you’re on pins and needles, so let’s get to it.

The FTC just announced a case against a company, doing business as iV Bars, that offered customers the chance to sample its “intravenous cocktails” for $100 or more a pop. According to the complaint, the company said — without adequate proof – that some of these cocktails could treat diseases like cancer, congestive heart failure, multiple sclerosis, and diabetes. The company even said its cocktails were sometimes more effective than conventional medical treatments. What’s more, the company claimed that the health benefits were backed by science and that it ran something called the “iV Bars Research Labs.” No they weren’t and no it didn’t, says the FTC. No science and no labs were behind those bars, even though the company’s website used pictures of people in white lab coats looking at test tubes and through microscopes. The complaint also notes that taking these iV treatments comes with safety risks and possible side effects. Now, the company will be prohibited from making false and unsupported health claims and has to send a notice to customers that its cocktails aren’t scientifically proven to treat any disease.

Before you belly up to a bar serving cocktails with an iV drip, and before buying any product advertised to prevent or treat a medical problem, here are some tips:

1. Talk first to your health professional, who is, bar none, the best source of help and information.

2. Don’t stop taking medicine or any other treatment prescribed by qualified health professionals without consulting them first.

3. Don’t get drunk on the possibilities in sales pitches for health-related products. Even when the word “science” is thrown around by serious-looking people in lab coats.

This article by the FTC was distributed by the Personal Finance Syndication Network.

Hang up on Medicare Card Scams

Scammers follow the news – and the money. A few months ago, we shared the news that Medicare is sending new cards to everyone who gets Medicare benefits, replacing your Social Security number with another number. As expected, scammers have been trying to cash in on this change.

These scammers typically reach out by phone and have tried a few different tactics. Sometimes, they claim to be a Medicare representative and ask to verify (ahem, steal) your information. Or they claim that there’s a fee for your new card (there isn’t). Others claim that your Medicare card was compromised and you need to move your money from your bank into “safer accounts” (it wasn’t, you don’t, and following their advice means putting your money in their pockets). We’ve even heard of some scammers offering plastic versions of the card for a fee – even though the real Medicare cards are paper and there are no legitimate plastic cards.

How can you avoid these scams? Remember these tips:

  • Don’t give personal information to get your new Medicare card. If someone calls claiming to be from Medicare, asking for your Social Security number, bank information, or other information to get your new card, that’s a scam. Hang up. Medicare will never ask you to give personal information to get your new Medicare number and card.
  • Don’t pay for your new card. It’s yours for free. If anyone calls and says you need to pay for it, that’s a scam. Hang up.

If you’ve already given out your bank account information over the phone, talk to your bank immediately. You’ll want to deal with any unauthorized activity on your account as soon as possible.

For more information about the new Medicare cards, go to go.medicare.gov/newcard.

And if you’re a victim of a scam, report it to the FTC.

This article by the FTC was distributed by the Personal Finance Syndication Network.

New Research Report on the Geography of Credit Invisibility

Creditworthy consumers can face difficulties accessing credit if they lack a credit record that is treated as “scorable” by widely used credit scoring models. These consumers include those who are “credit invisible,” meaning that they do not have a credit record maintained by one of the nationwide consumer reporting agencies (NCRAs). They also include those who have a credit record that contains either too little information or information that is deemed too old to be reliable. The Bureau published two previous Data Points about consumers with limited credit histories. The first, Credit Invisibles, estimated the number and demographic characteristics of consumers who were credit invisible or had an unscorable credit record. The second, Becoming Credit Visible, explored the ways in which consumers establish credit records. 

According to these Data Points, consumers who are Black, Hispanic, or living in low-income neighborhoods are more likely to have trouble accessing credit due to an unscorable credit record or no record at all. A long-standing concern relating to credit access for the Bureau and other policymakers is the importance of geography in accessing credit. This concern goes at least as far back as early efforts to combat redlining and other forms of unlawful discrimination. Redlining is a term used for an illegal practice under which people living in a certain area or neighborhood are not given the same access to credit as people in other areas or neighborhoods on the basis of race, color, or another prohibited characteristic. Identifying cases of redlining has been a priority for the Bureau and other agencies.  

In conjunction with the Bureau’s symposium, Building a Bridge to Credit Visibility, we released a third Data Point discussing credit invisible consumers, The Geography of Credit Invisibility, which provides a closer look at the relationship between geography and credit invisibility. This study examines geographic patterns in the incidence of credit invisibility to assess the extent to which where one resides is correlated with one’s likelihood of remaining credit invisible. 

Key findings include: 

Focusing on the incidence of credit invisibility among adults 25 and older may better identify tracts where access to traditional sources of credit is more limited

Our research found that over 90 percent of consumers transition out of credit invisibility by their mid-to-late 20s. This observation may indicate that focusing on the population of consumers age 25 and older is most useful in identifying geographic areas where traditional sources of credit are scarce, sometimes referred to as “credit deserts.” 

Credit invisibility among adults 25 and older is concentrated in rural and highly urban geographies

Our research found that, while credit invisibility is more common in rural areas as a percentage of the population, over two-thirds of adults 25 and older who are credit invisible reside in metropolitan areas because of the higher population within those areas. We also observed elevated likelihood of credit invisibility in rural areas regardless of the tract’s income level, in contrast to a strong relationship between neighborhood income and the likelihood of credit invisibility in highly urban areas.

Consumers in rural and low-to-moderate income areas use credit cards as entry products less often than consumers residing in other geographies

Among consumers who successfully transition out of credit invisibility, the overall rate of using a credit card as an entry product is much lower for those living in rural areas. Additionally, among this same population, our research found that the rate of using a credit card as an entry product is also lower for consumers living in lower-income neighborhoods. This result is more pronounced in highly urban areas.

Lack of internet access appears to have a stronger relationship to credit invisibility than does the presence of a bank branch

While younger adults residing near bank branches in highly urban areas used credit cards as entry products more often than those residing further away, overall we found little relationship between distance to the nearest branch and the incidence of credit invisibility. In contrast, our research did find that many credit products are originated through online means, causing credit invisibility to be more prevalent in areas with less internet access.

While determining the underlying factors that cause sustained credit invisibility is difficult and beyond the scope of this study, highlighting areas where credit invisibility is more common can help policymakers focus on those areas and advance the conversation about potential causes and solutions.

This article by was distributed by the Personal Finance Syndication Network.


Renovation Tips for an Age-In-Place Smart Home

A house is more than walls, roofing, and appliances — those are just the requirements to make a building. A house is where you raise your kids, where you cook breakfast on the weekends, where you celebrate holidays with your family. It’s a place where you can sit in contentment, growing old with the ones you love, living your life in it day by day.

For most Americans, buying a house is not a temporary investment. Once you find the right house for you and your family, you’d like to live in it for the rest of your life. However, growing old presents challenges to this plan. Health issues, including healthcare needs, mobility limitations, and disease and illness care can make it difficult to stay in the same house as you age. Fortunately, the age of smart homes can optimize your house to fit your needs and allow you to grow old in your own home.

Fixing Up Your Home

For many, the most challenging part of renovating your home is keeping the financial aspect in check. Even if you have money to spend on such a project, it can be all too easy to overspend and ruin your budget. For that reason, it is important to set a budget, make a plan, and stick to it as much as you can.

Setting a Budget

Before you start making concrete decisions about your renovation plans, you’ll need to set a budget. It is tempting to look at home design magazines and websites and get swept up in the glamor that they show off, but it’s important to keep quality and budget in mind before glamor.

If you do need to borrow money for your renovations, you have several options to choose from. One of them is peer-to-peer lending, which you can do through companies that offer contracts. More home improvement loan options include home equity loans, lines of credit, and personal home improvement loans.

Each type of loan has its benefits and drawbacks, so look into each option carefully before you commit. Depending on your ability to pay your loans back, make sure to only borrow what you can reasonably afford to pay back.

Making a Plan

While you are drafting out your home improvement budget, make a list of the improvements in order of importance. Make sure to put smart home technology that will help you live comfortably in your home at the top of the list, and then put your nonessential wishes in descending order.

Also, keep in mind the value of your house and don’t make renovations that can decrease the value of your home. Only make improvements that you know you can handle. Some DIY projects can be done by any home owner, but others can end up costing you too much money for a poor job.

Creating Functional Spaces

The whole point of making age-in-place renovations is to make your house functional for you to live with. Perhaps a good first step is a health evaluation. You can talk to your doctor about your current health what health problems you might encounter in the future. From there, you can get started on making bigger decisions and getting the renovation process started.

Declutter and Downsize

The first physical task you should tackle is decluttering and downsizing. If you have lived in the same house for many years, then you might have a lot of extra stuff lying around. Whether it’s boxes in your garage, clothes that you never wear, or unnecessary furniture, get rid of anything you don’t use.

It might be difficult to get rid of some of your personal items that you’ve acquired over the years, but doing so will truly make your house more functional. The benefits of decluttering and downsizing include making your space easier to clean, less house work to take care of, and your home feeling more peaceful.

Healthcare Smart Tech

Once you have cleared out some of your older, nonessential belongings, you can start looking at smart home technology that will allow you to comfortably age in your own home. According to Arizona State University, advancements in smart tech health allow the following to be possible:

  • Monitoring trends in vital organs
  • Detecting unstable physiological status
  • Providing medical management
  • Enhancing patient safety

Getting smart devices that can cater to your specific healthcare needs is essential for keeping your home livable as you age. As stated in the report by ASU, any devices or apps that encourage healthy behaviors, analyze your lifestyle, remind you about medication and doctor’s instructions, record your activity and diet, are helpful assets for your health.

ASU recommends appliances and devices that monitor your health, such as those from FitBit and Garmin, that are wearable trackers as well as wellness apps. Additionally, you should consider using apps that help you with disease management, such as Dosecast and MediSafe, which actively monitor any diseases you might have.

Get New Furniture

Getting new furniture will also be important for making your home suitable for yourself. For example, if you have smaller rooms, make sure to get furniture that lets you walk around comfortably without tripping. You furniture should also be tall enough so that it is easier to get up, and stable enough to support you without getting knocked over. The last thing you want are physical injuries caused by inconvenient furniture.

Remodeling Guide

When thinking about making physical changes to some of your rooms, you want to keep convenience, safety, and motility in mind. You can consider putting in an intercom or phone system in a few rooms in your house for better communication and accessible emergency calling. You should also make sure that your flooring is not too slippery to avoid the possibility of falling.

Invest in Your Kitchen

The kitchen makes up a big portion of a house’s worth because it is a central room in the house. You should update your kitchen if you currently are having trouble maneuvering around it. Some possible ideas for remodeling your kitchen include replacing the cabinets so that they are at a height that allows you to comfortably reach everything, replacing your sink so that it is a good depth, and getting a faucet that is easy to turn on and extends to a comfortable position.

Remodeling your kitchen is a large task, and will require its own plan if you intend to make large-scale renovations. You can check out step-by-step tips for remodeling your kitchen to make sure you get a high-quality job done on it.

Bathroom Updates

The bathroom is another room that you will want to optimize for ease of use. The most important detail to keep in mind is the shower. If you currently have a tub, you should replace it with either a shower, or a tub that has a door. This will help you avoid tripping or falling in the shower. Besides that, think about sink height and storage use. You might want to add in a medicine cabinet to keep your medication safe and organized.

Rethinking Your Landscape

Lastly, you’ll want to take a look at your landscaping. Yards and gardens can take a lot of work to maintain, so do what you can to make it easier on yourself. A great change you can make is to get rid of your lawn. Not only will that remove the need to mow, water, and feed the lawn, but it is better for the environment and will lower your bills.

When renovating, you should consider future needs. Even if you are currently in good health, think to the future. It is better to make these kinds of renovations early on, and then you don’t have to worry about having to make extensive renovations when you are older. Using smart home technology, decluttering, and working to make your house accessible will make it more possible for you to age in place in the comfort of your home.

This article by Devin Morrissey first appeared on Dyer News and was distributed by the Personal Finance Syndication Network.


Defendant Who Took Part in Business Coaching Scheme Agrees to Settle FTC Charges

One of the defendants involved in a multimillion-dollar business-coaching scheme has agreed to settle Federal Trade Commission charges that he helped deceive consumers with false claims that they could earn “six figures” within 90 days.

The defendant in the case, Sean Brown, allegedly helped operate the coaching scheme, which did business under the name Digital Altitude. The final order bans Brown from selling business coaching programs and investment opportunities.

In addition to the false claims about how much money people could earn, Digital Altitude falsely promised to provide individualized coaching from successful marketers, who in fact were just salespeople selling costlier membership levels, according to the FTC. The FTC alleges that most people never earned the promised income and that consumers lost tens of millions of dollars to the scheme, including some individuals who lost more than $50,000.

Under the settlement order, Brown is also banned from having any ownership in any business engaged in business coaching programs and investment opportunities. In addition, he is prohibited from credit card laundering, making misrepresentations about any product or service, profiting from consumers’ personal information collected as part of the scheme, and failing to dispose of that information properly.

The settlement order also imposes a $10.8 million judgment against Brown, which will be suspended when he has surrendered certain assets. The full judgment will become due immediately if he is found to have misrepresented his financial condition.

Earlier this year, Morgan Johnson, an officer in Digital Altitude, and The Upside LLC, a company Digital Altitude used to process consumers’ credit card payments, were banned from selling business coaching programs and investment opportunities under settlements with the FTC. Litigation continues against the remaining defendants.

The Commission vote approving the proposed stipulated final order against Sean Brown was 5-0. The U.S. District Court for the Central District of California entered the order on September 5, 2018.

This article by the FTC was distributed by the Personal Finance Syndication Network.

FTC Shuts Down Purveyors of Fake Documents Used for Fraud, Identity Theft

Websites sold fake pay stubs, other documents

The operators of websites that sold fake documents used to facilitate identity theft and other frauds have agreed to permanently shut down their businesses as part of separate settlements with the Federal Trade Commission.

In separate cases filed by the FTC, the Commission alleged that Katrina Moore, Steven Simmons, and George Jiri Strnad II and their affiliated companies operated websites that sold customers a variety of fake financial and other documents – such as pay stubs, income tax forms, and medical statements – which can be used to facilitate identity theft, tax fraud, and other crimes.

“The sale of fake documents makes it easy for identity thieves and scammers to ply their trade,” said Andrew Smith, Director of the FTC’s Bureau of Consumer Protection. “This action demonstrates the FTC’s determination to stop those who help people to commit identity theft and fraud.”

Identity theft was the second biggest category of consumer complaints reported to the FTC in 2017 – accounting for nearly 14 percent of all the consumer complaints made last year. Credit card fraud was the most common type of identity theft reported by consumers in 2017, followed by tax fraud.

The complaint against Moore and her business, Innovative Paycheck Solutions, alleges that she promoted the sale of a variety of financial documents on the website she operated, FakePayStubOnline.com. In addition to fake pay stubs, these documents included bank statements and profit-and-loss statements. The site stated that the documents look authentic and sold for as little as $40 for a fake pay stub to more than $150 for fake tax returns. The site offered visitors the choice to customize their documents and to edit real bank statements, touting its “Custom Fake Pay Stub” and “Fake Pay Stubs Online, Quick, Easy, Accurate Pay Stubs.”

In its complaint against Simmons and his business, Integrated Flight Solutions LLC, the FTC alleges he operated the NoveltyExcuses.com website from 2013 until October 2017, where for $19.95 he sold a variety of financial, identity, and medical documents including pay stubs, auto insurance cards, utility and cable bills, doctor’s excuses, and medical absence reports. Like Moore’s website, Simmons’ NoveltyExcuses.com advertised that the documents the site offered were fake but looked authentic, saying it could provide “Quality Authentic Fake Forms! Proven to Work!”

From about 2014 through March 2018, Strnad operated similar websites, including PayStubDirect.com and PaycheckStubOnline.com, that offered fake pay stubs, tax forms, and bank statements, according to the FTC’s complaint. His iVerifyMe website sold job verification services in which he claimed to verify employment and income for customers, the FTC alleges. As with the other defendants, Strnad’s websites advertised that the documents were fake but looked “authentic.” At the same time, his iVerifyMe site advertised that it could verify the employment claims made using the fake pay stubs offered from his other websites, according to the FTC.

The Commission noted in all three complaints that fake financial and identification documents can be used to commit identity theft and loan fraud. Identity thieves can use fake documents to apply for credit cards along with stolen personal information. When an identity thief fails to pay the credit card bill, the victim’s credit suffers.

The sites offered by the defendants claimed that the fake documents were for “novelty” and “entertainment” purposes but failed to clearly and prominently mark such documents as being for such purposes and did not state on the documents themselves that they were fake, according to the complaints.

The Commission alleges Moore, Simmons, and Strnad violated the FTC Act’s prohibition against unfair practices.

As part of her proposed settlement with the FTC, Moore is permanently prohibited from advertising, marketing, or selling any fake documents or services and providing any means to others to make misrepresentations about an individual’s identity, finances, residency, taxes, or employment. She also has agreed to pay $169,000, all of which is suspended due to her inability to pay.

In his proposed settlement, Simmons agreed to similar conduct prohibitions and to pay $15,000, which also has been suspended due to his inability to pay. The full amount will become due if either defendant is later found to have misrepresented their finances. Strnad agreed to similar conduct restrictions in his proposed settlement and to pay $133,777.

The Commission voted 5-0 to approve the three complaints and stipulated final orders. The FTC filed the proposed order with Moore in the U.S. District Court for the Central District of California, while the proposed order with Simmons was filed in the U.S. District Court for the District of Oregon, Portland Division, and the proposed order with Strnad was filed in the U.S. District Court for the Southern District of Texas, Houston Division.

NOTE: Stipulated final orders have the force of law when approved and signed by the District Court judge.

This article by the FTC was distributed by the Personal Finance Syndication Network.

FTC Settlements Ban Fraudulent Debt Collectors from Debt Collection Business and from Buying or Selling Debt

The operators of a Georgia-based debt collection business that allegedly used false claims and threats to get people to pay debts – including debts they did not owe or that the defendants had no authority to collect – are banned from the debt collection business and from buying or selling debt, under settlements with the Federal Trade Commission.

According to the FTC’s complaint, the defendants’ debt collection business model was based on falsely claiming to consumers that they had committed a crime and would be sued, have their wages garnished, or be put in prison if they did not pay purported debts. In many instances, the defendants collected on debts consumers had already paid or that the defendants otherwise had no authority to collect. They also illegally contacted consumers’ employers and other third parties, and failed to provide written notices and disclaimers required by law.

The settlement orders also prohibit the defendants from misrepresentations regarding any financial products and services, and from profiting from or failing to properly dispose of customers’ personal information collected as part of the challenged practices.

Each order imposes a $3,462,664 judgment that will be partially suspended, due to the defendants’ inability to pay, when they have surrendered certain assets. In each case, the full judgment will become due immediately if the defendants are found to have misrepresented their financial condition.

The Commission vote approving the proposed stipulated orders against Lamar Snow, Global Processing Solutions LLC, Intrinsic Solutions LLC, North Center Collections Inc and Diverse Financial Enterprises Inc., Jahaan McDuffie, Capital Security Investments LLC and American Credit Adjusters LLC, and Glentis Wallace, also known as Glen Wallace, was 5-0. The U.S. District Court for the Northern District of Georgia, Atlanta Division, entered the orders on July 17, 2018.

The Court entered default judgment against the remaining defendants—Advanced Mediation Group, LLC, Apex National Services, LLC, Mirage Distribution, LLC, and Mitchell & Maxwell, LLC—on September 4, 2018.

NOTE: Stipulated final orders have the force of law when approved and signed by the District Court judge.

This article by the FTC was distributed by the Personal Finance Syndication Network.

Should You Consider a 401k Loan to Repay a Personal Loan?

According to the Investment Company Institute, there’s nearly $4.5 trillion in 401k retirement accounts representing about 18% of all retirement assets. But many people for various reasons have taken out a 401k loan.

Even though they’re popular, 401k loans can be confusing. Making a bad decision on a 401k loan could put your retirement savings in jeopardy. So we contacted Certified Financial Planner® Jeff Nordin to help us understand 401k loans. Jeff has an MBA from Cornell University, founded CoreFinancialConcept.com and has over 20 years of experience advising clients.

Q: Why are people so quick to take out a 401k loan?

Mr. Nordin: 401k loans seem to be driven by people looking to pay off credit card debt or experiencing an emergency.

People should look to borrow from their 401k only if no other options remain. The two biggest reasons for this are removing pre-tax dollars from your 401k but repaying with after-tax dollars and reducing the earnings power (tax-free) of your retirement money.

That said if your plan allows for loans, you may borrow up to 50% of your vested account balance, or $50,000, whichever is less. Also, employers can put stipulations on what the loan can be used for, and loans must be paid back within five years.

Q: What are some of the reasons that you’d want to repay a 401k loan as quickly as possible?

Mr. Nordin: The single biggest reason is to get those funds back in your 401k growing free of taxes. The power of this over time is a huge ally toward having a sufficient retirement fund down the road.

Q: Some are advocating using a personal loan to pay off a 401k loan, especially since there are so many new lenders like SoFi, Prosper, Lending Club, etc. available. What advantages could there be for the borrower?

Mr. Nordin: The big advantage is paying your 401k back sooner rather than later.

Low rates could be another advantage. Even though you are "paying yourself" the interest (401k loans are typically one or two percent above the prime rate, currently 3.5%), you’re not just paying interest, but also missing out on earning a tax-free return on the borrowed funds. If one expects an 8% return, that 401k loan could be "costing" you 13% or more!

Q:There are always some drawbacks. What’s the downside of using a personal loan to repay a 401k loan?

Mr. Nordin: One real potential disadvantage would be paying a substantially higher interest rate on a personal loan.

Q: Are there any circumstances where the personal loan or 401k loan is always better?

Mr. Nordin: Rate and terms comparable, a personal loan would almost always be superior to borrowing from your 401k.

Q: Are there any questions that the borrower should ask themselves before making a final decision?

Mr. Nordin: The easy-for-me-to-say-to-ask-yourself questions are "Why is it that I need to borrow in the first place?" and "What steps do I need to take to get my financial life in better order?"

Exhaust all options, including personal loans and even borrowing from family, before resorting to a 401k loan.

This article by Gary Foreman first appeared on The Dollar Stretcher and was distributed by the Personal Finance Syndication Network.


Free Publications about Credit and Debt

Do you work or volunteer with people who are concerned about debt or want to improve their credit? Then you might be interested in these three new free booklets. Delivery to your home or office is free, too. Each booklet also is available as an online article.

  • Getting Out of Debt has tips on dealing with car, mortgage and student loan debt. It also explains credit counseling, debt relief services and scams, as well as the two main types of personal bankruptcy.

  • Fixing Your Credit tells you how to order your free credit report online, by phone, or by mail using a form included in the publication. It also describes steps you can take to fix errors on your report and improve your credit, and how to spot a credit repair scam.

  • Debt Collection FAQs answers your questions about debt collection. It covers when and how a collector can contact you, what to do if you think you don’t owe a debt, and what your options are when a collector contacts you about an old debt.

Place your order now at bulkorder.ftc.gov.

This article by the FTC was distributed by the Personal Finance Syndication Network.