5 stupid 'fixes' for money woes

The idea is that after a few months of not getting paid, your creditors will agree to a fraction of what they're owed.

Of course, your credit will be trashed at this point, you'll have paid fat fees to the debt-settlement company, and you may be facing lawsuits from your lenders. That's if you're lucky. If you're not, you'll risk all this, and the debt-settlement company will disappear with your money. If you need more details, read "Debt settlement: A costly escape."

Better alternatives include:

• Credit counseling. Legitimate credit counselors have debt-management plans that reduce or eliminate the interest rates on your credit card debt. You can find one by visiting the Web site of the National Foundation for Credit Counseling. (Credit counseling may have implications for your credit rating -- read "The consumer's guide to credit counseling" for details -- but the effect is far less than if you try to settle your debts.)

• Bankruptcy. If you can't pay your debts, you may be better off getting a fresh start through bankruptcy. Your credit rating may recover more quickly, and you'll be able to keep the cash you would have otherwise sent to the debt-settlement company. Consult an experienced bankruptcy attorney who can evaluate your situation and discuss your options. MSN Money's bankruptcy guide offers resources, information and tips.

Stupid fix No. 4: Debt-consolidation loans from private lenders

If you owe money to lots of creditors, you may be a sucker for pitches from debt consolidators, which promise to combine all your debts into one "affordable" loan.

Unfortunately, though, these loans often come with high interest rates and hidden fees. Instead of helping you pay your debt off faster, a debt-consolidation loan can stretch out your repayment schedule so you actually end up paying more. (See "Insider's guide to debt consolidation.")

Better alternatives include:

• A do-it-yourself plan. If your credit's good, you may be able to negotiate lower interest rates on your debt. (See "Get a better deal . . . with a threat" for techniques.) Then you can tackle your bills one at a time, starting with the highest-rate debt or the credit card that's closest to its limit, while paying the minimums on your other debt. Once this high-priority debt is paid off, make the same-size payment to the next-highest-priority debt. Continue until you're debt-free.

• A debt-consolidation loan from a credit union. Because they're member-owned, credit unions tend to offer more-reasonable interest rates than other lenders.

• Credit counseling. If you can't afford to make the minimum payments on the debt you have, a credit counselor's debt-management plan might be your best option. See details above.

• A home-equity loan. Consider this option only if you have plenty of equity in your home, you stop the behavior that got you into debt in the first place and you pay off the loan as quickly as possible. Otherwise, you'll just be draining one of your most important assets, and you'll wind up deeper in debt in short order. (See "3 tips: How you can still refinance.")

Stupid fix No. 5: Retirement plan withdrawals

I think I've heard every idiotic rationale for raiding 401k's and individual retirement accounts: "Well, the market isn't doing that great anyway." "I'm young. I'll have plenty of time to build it up again." "But I need the money."

To which I respond: "So what?" "No, you don't" and "No, you really don't."

You'll have to pay penalties and taxes on any withdrawal. Worse, you've lost all the future tax-deferred returns that money could have earned. If you're 30 years from retirement, figure every $10,000 withdrawal costs you at least $100,000 in lost future retirement income, assuming 8% average annual returns (and yes, over time the stock market should do at least that well).

The younger you are, the worse the damage. Someone 40 years from retirement would lose more than $200,000 for each premature $10,000 plan withdrawal.

Better alternatives:

• Retirement plan loans. These are far from risk-free, but they're better than withdrawals. Most workplace plans, including 401k's and 403b's, allow you to borrow up to half your balance or $50,000, whichever is less. Typically, you pay the money back over five years. Keep in mind that if you lose your job and can't pay back the loan, it becomes a withdrawal -- with all the taxes, penalties and lost returns you were trying to avoid.

• Just keep your hands off. In general, leave your retirement accounts for retirement. You can usually find a better solution to your money problems than raiding your future.

Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston’s award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Updated June 16, 2009

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