When the unsat contractor wins...what now?

Q:  Hi June,

What advice would you give to someone who’s been sued regarding where to come up with money to pay a settlement and legal fees, especially in this time of financial crisis?  I got in this situation for non-payment of a subcontractor who didn’t perform, and I was the one who was found at fault, so according to the law, if you agree to pay, you pay -- regardless of the outcome.  Boy, do I feel stupid for not just paying the guy whatever he wanted in the first place!  The lawyer is the only one winning.

Most of the advice I find is related to reducing debt. Some situations, like mine, require a person to come up with a large sum of money that they just don’t have, or else.

Do you have any thoughts on that?  Thank you.

--Gina, San Antonio, TX

A:  You are indeed in a pickle, but I understand. It is difficult to cowboy up and pay for substandard work. I would certainly consider turning your contractor into the Better Business Bureau to help warn off others who may be considering using this guy for their project. First, I would check with your attorney (or get a second opinion) regarding the judgment - can they get blood out of a turnip? Will the opposition settle for less than the judgment? Is your lawyer willing to negotiate legal fees or work out a payment plan with you?

Here's what I recommend (flying somewhat blind and assuming you have great credit) in the order of priority:
1. Tap your emergency fund as this truly is one.
2. Liquidate non-retirement investments. This is a tough time to sell but you could benefit from capital gains tax rates or if you have losses you can deduct up to $3,000 per year from ordinary income.
3. Take out an unsecured loan. These are usually for minimal amounts of money and interest rates can be high.
4. Leverage your home equity. Just be sure the monthly expected payment is affordable.  While you are putting your home at risk, at least you can benefit from tax-deductible interest.
5. Borrow up to $50,000 from your 401(k). You'll pay yourself interest on a set time schedule, but should you change firms you'll be expected to pay it all back at once or it's considered an early distribution (taxes and penalties).
6. Borrow from friends and family. This has obvious pitfalls.
7. Take an early distribution from retirement accounts. This will generally be subject to income taxes and penalties if younger than 59 and ½ (except Roth IRA contributions can be withdrawn anytime tax and penalty free).
8. Default on the judgment. Ask your attorney for info regarding the ramifications.
9. File bankruptcy. I'm not a big fan of this tactic as it will haunt you for years and years.

I really can't stand the idea of robbing your future by tapping investment accounts, but sometimes when your back is against the wall it's all you can do. Have you considered calling one of the local TV stations to do an “On Your Side” piece?  Most of them have a consumer reporter that looks into “unsat” stuff like this. I hope this helps and I wish you the best of luck.