Bad Choice A Rock And A Hard Place

[DrScooter]

Okay, it's a mistake but one of many. I'm getting old,went back to school late and started a new career 14 years ago. That's not the bad, of course I have house, wife and almost $70K in TSP not counting my TSP loan, that's the bad.

I/we were faced with a major construction project on our home a retaining wall had to be rebuilt that held up the house and we had little choice in the matter. Not only would insurance not cover the project but we would loose even that if it was not completed within a year. Long story short needed $50K and ended up borrowing $32K from TSP that was 2 years ago.

At this time still owe TSP $21K, again have an active account at $70K but as times move on and things just cost more and the major bummer for me I just cannot pay my student loans (my wife has even bigger ones) we are clearly in a negetive cash flow of about $300 a month.

Selling the house with this market is very bad, we are current on all bills but the fact is I won't be soon unless I free up cash.

I want to default on my loan and just eat the loss and be done with it. I could then pay my student loans on time, reduce some of our credit card debt and at least tread water without sinking deeper.

Is it possible to just default on TSP by choice? As it is I have cut back to adding just 6% as I get a match up to 5% and although I don't try to (over) time the market moved to a defensive G Fund position in April as I thought a market crash was just going to happen this summer which did save me a haircut. At some point I will move back to a more balanced position.

At this time what I really want is to just dump this debt and move ahead as it seems worse for my ulcers to have to continue to rob Peter to pay Paul. They say "if" one misses a payment it places one in default, the payments of course come out of "Payroll" can I force a missed payment, or can I file some sort of hardship form? I read up TSP financail hardship which would opt me out for 6 months, might have to do that but it seems better to just default the loan and to continue saving what I can. Without the TSP loan I would increase takehome by like $500 and pay my $350 student otherwise, clearly something is going to really crash.

 

[Birchtree]

Man, if I were you and in that tight I would seriously consider a part-time job several evenings a week or a Saturday job and use that money to pay on TSP - don't injure your credit rating in this environment. You actually might enjoy a small job cleaning or pushing burgers - there are many things you can do to further pitch in to help yourself. Try not to take the easy way out. It just takes time to make progress. I actually worked in a donut shop once upon a time when I got jammed up when I first got out of the service.

 

[tsptalk]

I agree with Birchtree. Taking the easy way out keeps the cycle going. No pain, no gain.

Best of luck!

 

[ATCJeff]

If you default on the loan, which I don't think you can, you'll have a huge tax bill to pay on the 21K plus possible penalties.

 

[camper65]

SOMETIMES, sometimes, it's just best to cut and run!
(Suddenly that 20 tons that you have been carrying disappears)
Just be sure you are aware of the consequences.

 

[Show-me]

First you can NOT default unless you quit your job. Then when you do default the remainder of the principle balance owed will be due immediately and if not paid back you will be taxed for that amount due as ordinary income.

IMO, the second job is the most practical and least costly and the least credit damaging.

From TSP.gov:

While you are employed by the Federal Government, you may be able to withdraw your own contributions and earnings for a financial hardship. The amount of the financial hardship withdrawal is limited to your financial need. You cannot withdraw less than $1,000.
To be eligible for a financial hardship withdrawal, from at least one of the following four conditions: negative monthly cash flow, medical expenses (including household improvements needed for medical care), personal casualty losses, or legal expenses for separation or divorce.
To help you determine whether you have a negative monthly cash flow and the amount of the negative monthly cash flow, you can complete the worksheet that is provided with the Financial Hardship Withdrawal Request (Form TSP-76). To complete the worksheet, you will have to use financial information for yourself and, if you are married, your spouse. You will have to determine yoyour financial need must result ur monthly income (i.e., from employment, child support, and alimony) and expenses (i.e., housing, utilities, dependent care, alimony and child support, and installment loan payments for loans other than TSP loans). The worksheet also provides factors to determine an allowance for ordinary household expenses based on income and family size. The allowance takes into account items such as food, clothing, health insurance premiums, entertainment, and other miscellaneous expenses. (Credit card payments are included in this allowance so they cannot be used in determining expenses.) You do not have to return the worksheet with your request for a financial hardship withdrawal.
Although you will not have to provide either income information or documentation to substantiate the financial hardship, you should retain this information and documentation for future reference because you will have to certify on the Form TSP-76, under penalty of perjury, that you have a genuine financial hardship and what the reason for the financial hardship is.
After making a financial hardship withdrawal, you cannot contribute to your TSP account for 6 months. If you are a FERS participant, you will not receive any Agency Matching Contributions for the period which you are not making employee contributions; however, you will continue to receive Agency Automatic (1%) Contributions. At the end of the 6-month period, your contributions will not resume automatically. You must make a contribution election on Form TSP-1 (or your agency's electronic version) and file it with your agency if you want to resume contributions. Your contributions will then be allocated according to your most recent contribution allocation. You are eligible to request another financial hardship withdrawal 6 months after your previous one.

 

[James48843]

First you can NOT default unless you quit your job. Then when you do default the remainder of the principle balance owed will be due immediately and if not paid back you will be taxed for that amount due as ordinary income.

IMO, the second job is the most practical and least costly and the least credit damaging.

I agree. One other thing to keep in mind is that if you default, you could jeopardize your job as well. In my agency, failure to pay debts can get you fired.

Here is something to think about-What if you reamoratize the loan? Under the TSP rules, you can reamoratize the loan, spread the payments out over a longer period of time- up to a new 15 year period. It's not a good thing to do- but it is better than defaulting, at least in my book.

From: http://tsp.gov/features/chapter11.html#sub12

"You can also reamortize your loan. Reamortization means that your loan payments can be recalculated to increase or decrease the amount of your payments or to lengthen or shorten the term of the loan, or to change your pay cycle (i.e., biweekly to monthly). There are no limitations on how often you can reamortize the loan throughout the life of the loan."

In addition to looking for a second job, start looking for a higher paying first job. http://www.usajobs.com/

Third choice- and this is a Hail Mary- you said you owe 21K. But you didn;'t say whether this was considered a personal loan, or a residential loan. Read the fine print of the qualificaitons for residential loans:
http://tsp.gov/faq/loan-residential.html

It may mean selling the house toyour spouse, then taking out a new residential loan over 15 years to repay the exisiting 21K loan over the remaining 3 years.

Start thinking creatively.

The bottom line is this- you are in over your head. Sure, you'd like to keep the house. But face it- your expenses exceed your income.

While it it true that market prices for homes are down in most areas- let me ask this- do you owe less that it's worth? If you do, then you STILL are in a position to sell it, and find a cheaper place to live. If you are upsidedown then you are in bigger trouble. If the real estate market continues to tank, how soon will you be upside down?
THAT will be a real problem.

Although prices are down, that also means it's a buyers market. If you can sell your house now and still have a little left over for a down payment on something else, then you have the opportunity to buy a less expensive house and turn the cash flow issue around.

Don't get stuck on the house. You can live anywhere. You can live in a mobile home park, if necessary- I did the first year I had a federal job. I had to.

Do SOMETHING now to get out of negative cash flow, or it's only going to continue to get worse.

DO SOMETHING to get cash flow positive.

Cut off the cable tv, the phone, any unnecessary expense, and make a major change in the housing area, get another job, etc, until the bloodletting negative cash flow stops. It's THAT important.