Pay Off Debt Before Saving for Retirement

By Claudia Buck

RISMEDIA, Hard times elicit tough choices. This week, Steven Zeller, a Gold River, Calif.-based investment adviser, tackles a reader's question on credit card debt and mortgage loans.

QUESTION: I've entered into a hardship payment program with the six banks that issued my 10 credit cards. I'm paying off $80,000 at an overall interest rate of 6 percent (down from an average of 20 percent). Due to the reduced payments, I now have $3,000 in monthly surplus income to either invest with, or pay down the credit cards.

I also have an upside-down mortgage on a rental house owned as income property. The bank seems (unwilling) to either modify or reduce the principal so I can sell it.

In time, this will all find its way into (Chapter 11 bankruptcy) courts. Life would be simpler if I pay down the credit cards and concentrate on (getting) the house above water. Instead, I've decided to invest the surplus in ERISA retirement vehicles and Roth IRAs. They would be exempt from collections but available as bargaining chips when negotiating with creditors. What is your opinion?

ANSWER: I would not encourage anyone to go into bankruptcy proceedings if he or she can help it. It creates a lot of stress and is not the best for your self-esteem.

If you have 10 credit cards to pay off, 6 percent is a pretty good deal instead of 20 percent.

I would begin paying off the credit cards, starting with the smallest one first, until they are all gone for good.

It may be painful at first, but you will increase your cash flow over time by (eliminating) the monthly payments.

Then I would attack the upside-down situation with your rental. In the long run, it is better, financially and emotionally, to be debt-free. And if the (credit card issuers) are giving you that opportunity, I would jump on it.

It would be a great personal and moral accomplishment.

At the end of the day, if you pay into an IRA and Roth IRA instead of paying down your credit card debt, you will still have debt. As far as negotiating with the (lender) on your rental property, I'm not sure it would look at the situation very positively if it saw you were fully funding your IRAs.

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