Ramsey: Surviving medical leave

Published: Sunday, April 21, 2013 5:30 a.m. CDT • Updated: Sunday, April 21, 2013 6:42 a.m. CDT

Dear Dave,

I’ve been on medical leave from my job due to an injury. My doctor recently advised extending the leave another six months, but during this time I wouldn’t be paid. My husband makes $75,000 a year, and we owe $40,000 on our cars. This includes a $30,000 note on one of them. Should we take money out of our 401(k) to make it through the added time off?

– Crystal

Dear Crystal,

Absolutely not! You guys have dug a hole for yourselves, and borrowing from one place to fix another will only make that hole deeper. In cases like this you have to address the core issue. Your income has dropped significantly, so you need to cut your lifestyle to match your new income level.

My advice would be to sell the cars, at least the $30,000 one. There’s no justification for $40,000 worth of vehicles in your garage when you’re living on $75,000. It makes me think you don’t have any savings, either, if you’re talking about raiding your 401(k). Financially speaking, you have no room to breathe right now.

Serious situations call for serious actions. You’ve got to get your lifestyle down to a manageable level until you’re able to work again. And even then, there’s no reason to raise your lifestyle up to your income. Live on less than you make, Crystal. That’s what enables you to save money and be prepared when Murphy comes knocking on your door!

– Dave

Dear Dave,

I’m having trouble making my auto payment. I owe $20,000, and the car is worth $17,000. Should I allow the bank to repossess it, and could they take a lien against my house if they do?

– Jose

Dear Jose,

You bet they could slap a lien on your home. You never want to go through repossession if there’s any way to avoid that scenario. If they repossess, not only does your credit take a huge hit, you also lose control of the price of the car.

After a repo, the lender will sell the car and sue you for the difference. But if you sell the car, you might be able to work out a higher price, leaving you a lesser amount you’d owe for the difference. Chances are if your loan is with General Motors, they won’t work with you on the $3,000 difference. In that situation, you can either negotiate with the bank or go to another bank or credit union and get a small loan for the difference. Just make sure you pay the loan off as quickly as possible.

Keep in mind, too, that even if the car is worth $17,000, it won’t bring that much on the repo lot. More than likely it would sell for about $11,000, leaving you $9,000 in the hole. By giving up control, you’d create a much bigger financial mess. I wouldn’t do that.

– Dave

• Follow Dave Ramsey on Twitter at @DaveRamsey and on the web at daveramsey.com.

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