‘œLuck, bad if not good, will always be with us. But it has a way of favoring the intelligent and showing its back to the stupid.’ ‘“ John Dewey

Nearly a year after I filed bankruptcy, I found myself doing a bit better.   I was living in my 18-foot trailer, I’d bought a new-to-me truck (albeit at very lousy terms), I was putting money away in my retirement fund, and I was meeting my monthly expenses.   I had even managed, for the first time ever, to visit my sister who lived out of state.   I took my truck and trailer and camped on her property for a couple of weeks that summer.

Things weren’t idyllic, but they were much better than they were before I filed bankruptcy.   My budget was still pretty tight, but I was starting to have a little breathing room.

Almost as soon as I returned from my vacation, disaster struck.   The lovely tree that had been shading my campsite suddenly decided to shed a very large limb.   Just shortly after midnight on September 1, 1998, I was awakened by the sounds splintering wood, and the trailer bouncing around like a toy ball.

Luckily, both me and my pets were unharmed.   The trailer was a different matter.   At first, the damage didn’t seem so bad, but in the light of morning, I realized my trailer had probably been totaled.   The tree had punched through the roof, and the skylights, television antenna, and rooftop air conditioner had been completely smashed.   The rear wall was knocked in, causing the bathroom cabinets to separate from their moorings, spilling their contents onto the floor.

Almost immediately, the RV park tried to back away from responsibility.   It was an Act of God, they claimed, and therefore they weren’t responsible.   I argued they were responsible, because I’d asked them to trim the tree back several times.   I’d even asked them to trim it while I was on vacation, since my trailer would be gone for two weeks.   I contacted my insurance company, and hauled my trailer over to my favorite RV repair shop.   They gave me the extremely bad news: the repairs would cost at least $11,500.

In the meantime, the insurance company offered me $1,500 for my trailer, which is about what I thought it was worth.   Before I accepted, I started shopping for another RV, and realized that trailers of a similar size and age were running in the $5,000 range.   I conveyed this information to my insurance adjuster, who was very nice and quickly gave me a higher offer.   She was especially pleased when I told her I’d asked the park to trim the tree, because it allowed them to pursue a claim against the RV park.

I soon had a check for $5,000, but then I had another problem.   The insurance company wanted to haul my old trailer away immediately, even before I had time to buy a new one.   Worse, I was finding that most of the $5,000 trailers I looked at were in much worse shape than the one I owned.   I didn’t have extra cash to buy anything nicer, and I didn’t know what to do.

I spent every free moment frantically looking for a new living situation.   I still couldn’t find an apartment because of my bad credit and pets, nor could I get financing for an RV because of my recent bankruptcy.   Once again, I was contemplating homelessness.

Finally, I found a five-year-old trailer that was in decent shape that would meet my needs.   Unfortunately, it cost $2,500 more than I had in available cash.   I shared this information with my mother, hoping she would give me a loan.   Instead, she gave me some tough love.   ‘œIf you hadn’t filed bankruptcy, you wouldn’t be in this mess in the first place,’ she said.

Time was running out.   I broke my rule of not confiding my problems to co-workers, which turned out to be my lucky break.   My co-worker told me that I could borrow from my 401(k) plan for as much as five years.   Even better, the loan wouldn’t become due and payable if I found myself separated from my job.

I put those wheels in motion immediately, but ran into another problem.   Although I could borrow more than enough money to cover my needs for the trailer, they wouldn’t be able to cut me a check for 30 days.   I couldn’t expect the insurance company to wait a month to haul off my old trailer, nor could I expect the RV dealer to hold the new trailer for that long.   I needed a short-term loan, and I needed it quick.

I went to my father and begged.   He wasn’t really in the position to loan me money having recently moved, but I put it to him bluntly.   If I couldn’t get the $2,500, I was going to lose out on the trailer I’d found and I was going to be sleeping in my truck.   He relented and loaned me the money, though he did make me sign a promissory note.

In the end, the 401(k) loan was truly a blessing.   Not only was I able to borrow enough to cover what I needed for my new-to-me trailer, I could also pay off my truck loan.   With my father’s money, I bought the trailer, and 30 days later I paid him off, along with my usurious truck loan.

I moved into the new trailer and breathed a sigh of relief.   I didn’t like the fact that I was borrowing against my retirement fund, but at least I’d escaped the astronomical interest rate I was paying on my truck loan.

Lessons learned:

1.       An emergency fund is crucial.   After my bankruptcy, I should have prioritized my finances differently.   Instead of contributing the maximum to my 401(k) plan, I should have been contributing enough to make the most of my company matching and putting the rest into my savings account.   Had I done that, I might have been able to avoid borrowing money when disaster struck.

2.       Borrowing money from your 401(k) should be considered a move of last resort, because there are many disadvantages to doing so.   Most company-sponsored 401(k) plans require immediate repayment if you separate from your job, which makes these loans risky.   If you unexpectedly leave your job, you have to immediately come up with the cash, or be forced to take the unpaid amount as a distribution, which is subject to taxes plus a 10% penalty.   Even if you don’t have to worry about a payment upon termination clause, there’s still the issue of double taxation.   Contributions to your 401(k) are made with pre-tax money, where loan payments are made with after-tax money.   You’ll have to pay taxes again on your 401(k) withdrawals when you reach retirement.

3.       Don’t count on family or friends being able to bail you out when disaster strikes.   Although my mother was very much in the financial position to help me, she decided not to do so.   I was lucky my father was able to help, but as it turned out he needed to take out a short term loan in order to do it.   Although it’s nice to think your family can or will help you during a financial disaster, it’s best to have your own emergency plan in place.

4.       When settling an insurance claim, don’t feel obligated to accept the first number your adjuster offers.   If you aren’t satisfied, negotiate.   Since I was able to document that the cost of similar trailers on our local market was higher than their offer, I ended up with a settlement $3,500 more than I otherwise would have received.

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Photo Credit: Alex