Don't Touch That 401K!

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Please don't tap your 401K or retirement savings as a last resort to pay debt. Particularly credit card debt. In thirty years of bankruptcy practice I have seen this scenario time and again. Clients come to me for help after draining their retirement assets to pay credit card debt or medical bills. Bankruptcy is almost always a better alternative.

Outside bankruptcy, tapping retirement funds to pay debt is economically unsound. There are heavy tax penalties. And, no one can work for ever. I believe people do this because they are good people who believe in paying their obligations. Going that far, though, impacts you and your family for the indefinite future.

On the other hand, for the banks bad debt is a tax write-off for which they have already planned. They knew exactly what they were doing, and the statistical probability of default, when they gave you the money in the first place.

You, on the other hand, probably didn't realize what you were getting into. Or not completely. How difficult high-interest credit is to re-pay. How the balances never seem to go down. How they can strap your family's finances out of proportion to the value received. Many people also do not realize that unsecured debt is disfavored and easily discharged in bankruptcy.

Many people also do not realize that retirement assets are protected from forfeiture in bankruptcy. This has been undisputed since the mid-1990's. If an account is ERISA-qualified (including 401Ks, 403Bs, pensions and many others) its exempt status is rarely if ever questioned. It may not be clear from your account statement whether that is so. We always check to make sure.

Like most people, you want to pay your debts. But before you tap into your retirement, please consider that bankruptcy is a powerful corrective tool.

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