If you are drowning in a sea of debt and searching for a lifeline, you may be wondering whether you should declare personal bankruptcy or cash out your 401k to pay off what you owe. Either option has the potential to affect your finances for years to come, so being properly informed is your best plan of action. Is declaring personal bankruptcy right for you? Lets find out:
Declaring Personal Bankruptcy Vs. Paying Off Your Debt With Your 401(k)
Using Your 401k for Debt
Before cashing out your 401k to pay off debt, here are some important considerations:
- Remember, you put this money away tax free. When it’s cashed out, you will be required to pay income taxes on the total amount you draw out of your 401k.
- You will most likely have to pay a 10% penalty for withdrawing the money early.
- You may be able to settle your debt for less money than you actually owe.
- The difference between the amount you settled on and the actual amount of the debt may become a tax liability. You will be required to state the difference when you file taxes.
- If your 401k does not cover your entire debt owed, even with debt settlement, you will still be required to pay off the rest of your debt. So, wiping out your life savings may not be the answer. You could end up without a retirement plan in place but still in debt.
- Putting a set amount of money each year and building up your 401k took time, dedication, and effort. Depending on your current age, it may be extremely difficult to replenish the funds once you have withdrawn the money to pay off your debt.
If You Decide to Declare Personal Bankruptcy
Declaring personal bankruptcy is not without its perks, but it may not be the right choice for you. Consider the following:
- If you declare personal bankruptcy, your credit score will be negatively affected. Your credit report will state you filed personal bankruptcy and will not be erased for up to ten years, even if you are able to rebuild your credit.
- Some employers frown on hiring employees who have had to declare personal bankruptcy. Although they may not give this as a reason for not hiring you, your personal bankruptcy may be to blame.
- A 401k can usually not be touched by creditors or personal bankruptcy. This would mean, if you declare personal bankruptcy, the money you have saved for retirement would still be available to you.
- Although the money in a 401k can not usually be seized to pay off debts, if you take the money out of your 401k, your creditors will have access to it. If you decide to file personal bankruptcy, keep your retirement money in your 401k.
Rebuilding your credit score following personal bankruptcy will probably be much easier than replacing the money in a retirement account. Keep this in mind before you make your decision. Choose the method of relieving your debt that is right for you.
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