Should You Borrow from Your 401K to Avoid Bankruptcy?

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Should You Borrow from Your 401K to Avoid Bankruptcy?

As Philadelphia divorce lawyers some of the people we admire the most are the ones who will really do just about anything to try to meet their obligations. We often hear from people who are contemplating taking out a loan on their 401K to pay off their debts.

Much as we admire these individuals, we typically end up advising against this course of action. Here are 2 reasons why.

The balance of this loan can come due very quickly.

If you lose your job the entire balance of your 401K loan is due all at once. This is in part because of the 401K’s status as a tax sheltered financial instrument. You’ll get 60 to 90 days to repay it before the IRS starts assessing 10% penalties, and all the money becomes taxable.

In short, the 401K balance may just end up being another balance you have to place into a bankruptcy case. But now, you’ve lost big, because…

Your 401K account is protected under federal bankruptcy law.

Our government mostly wants people to be able to pay for their own retirement, and as a result have passed laws which keep your 401k money safe as long as you leave it in the account. Don’t withdraw any money prior to filing for bankruptcy. Withdraw even one dime and the protection goes away. Leave it alone, and you get to keep it.

(See also this post, and this one, which cover bankruptcy exemptions.)

Bankrate.com calls it the one time normal people get to act just like major corporations. It may feel wrong, but just remember plenty of companies with far more assets than you use every rule in the book to protect as much of their money as they possibly can, and there’s no real reason why you shouldn’t do the same. Your creditors will find a way to march on.

That money will sit there, collecting interest and growing, even as you eliminate debt through the bankruptcy process.

In this scenario, you lose your job and your retirement is safe. You roll the money over to your next 401k and you get to know that you have a shot at taking care of yourself when your golden years arrive.

Still not sure? Have questions about this entire process? Don’t hesitate to contact us, the attorneys at Sadek and Cooper. We offer free consultations, fair payment plans, and a chance to turn over a new leaf while protecting the assets you need the most.

 

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