How bad is it to cash out the retirement to avoid BK?

[zenbit]

I think I am somewhere around 50k to 60k in debt with unsecured credit (cc's, loans). All in all - there are only 3 or 4 big accounts. Not paying on them at the moment, so the clock is ticking, along with the meter.

I have a high income, and no assets. Upside down in the house.

I am still trying to assess all of my options... with Ch 13 being the most obvious. CH 7 is not an option due to my income.

I started very late with saving for retirement. Between 401k and two private retirement accounts at the firm where I work - I am vested in over 60k.

IF I were able to cash out, and after a hefty tax penalty - it still looks like it might be enough to settle my debts and be out of this mess. Sure my credit is destroyed... but I have a decent income, and am 42 years old... with a few decent years ahead.

How terrible of an idea is this?

I understand that with a Ch 13, my retirement accts would be off limits to the creditors and trustee. I guess I am really struggling with being under the microscope for 5 years... scraping by. I like that there is a definite light at the end of the tunnel with a CH 13, but on the flip side - really like the idea of trying to cash out and settle this mess as quickly as possible.

The biggest hurdle, even if I wanted to cash out - is that two of the accounts are untouchable until after termination. Not sure if anyone knows of any tricks to get around such a constraint. Can't imagine that they would prefer I quit in order to get a distribution. (If I could somehow get it all rolled over to the 401k, I might even be able to borrow enough against it to settle... which would be far better.)

Also - after reading some threads here, it occurred to me that since I work at a financial services firm - which requires us to carry a credit card for travel and the like, that I may have to report my BK, and that they could let me go as a result. This is what another forum user reported at the firm he works at.

That certainly complicates matters.

Any help - or even a kick in the pants, if appropriate, would be much appreciated. I have been very impressed with the wisdom and helpfulness I have come across here at these forums!

[AngelinaCat]

I have to say that PLEASE try to do everything possible to avoid cashing in your retirement accounts or borrowing from them. You do not know what tomorrow holds. You do not know that you will be employed in the next six months.

If I were you, I would tighten my belt, put the cc cards into a baggie of water and throw into the freezer. Then, learn to live on a cash basis and keep working diligently to pay off those cards. Start with the smallest one and double-pay that til gone, while making regular payments to the others. Then do likewise with the next smallest one.

Good luck to you.

[zenbit]

I am off the cc habit - just can't make min. pymnts

Hi and thanks for the feedback!

I am already completely off the credit card habit. It was like a house of cards (pun intended). Once I fell behind on one, they all collapsed. Crazy fees and interest rate hikes.

Even had a nice $2,000.00 over draft protection plan on my checking account that I never once abused - and it too is gone.

So I have to do something... cannot afford minimum payments on all of the accounts. I guess I could call and try to work out some sort of payment arrangements - but was under the impression that the interest and fees would keep racking up.

The biggest risk I see to cashing out my retirement - if I even could cash it out - is that my attempts to settle could fail, and I could end up with BOTH my retirement wiped out and STILL in a BK.

Really appreciate the feedback and food for thought though.

[AngelinaCat]

We did just about everything you are thinking of just to try to clean up our debt, ccs, medical bills, harrassment laswuits, and other bad judgments on our part. We lost 'Hub's 401k, a couple of life insurance policies, a little retirement that I had accrued at my last FT job of 2 and 1/2 years. Thank GOD my TIAA-CREF account is untouchable. Or it would be gone. I TRIED! But the way the plan was written up more than 30 years ago with my first employer, it is iron-clad that I cannot touch it until I am 59. I am 56 now.

We still had to BK. Most of what we owe is to the IRS, due to cashing in those accounts and other bad decisions I mentioned.

'Hub is 65 and we are living on his Social Security, a measily little pension, a yearly stipend from a Trust, my unemployment compensation and a PT job.

More food for thought....

[HHM]

Cashing out your retirement is the WORST possible thing you can do to deal with debt; No two ways to do it. Honestly, making that decision is the equivalent of deciding to eat a salad AFTER you know it has been poisoned.

[UpsideDownMI]

I would run the numbers of the cost to settle your debt by using your 401k versus how much you would have to pay in a chapter 13 plan. Once you have that info in front of you, you will be able to make a sound decision on your course of action to rid yourself of your debt.

I know that alot of people on this site are against using your 401k to payoff debt, but if the numbers make sense, I would say that is a viable option. As an example, say you could settle your debt 50% of the balance by using your 401k, when a chapter 13 would cost you 100%. Under that example I would say settling your debt would be the way to go. If the cost of a chapter 13 is less or the same cost as settling, I would go that route. Just my opinion. Hope it helps.

[AngelinaCat]

Cashing out your retirement is the WORST possible thing you can do to deal with debt; No two ways to do it. Honestly, making that decision is the equivalent of deciding to eat a salad AFTER you know it has been poisoned.

'Hub and I are the quintessential 'Poster Children'.

[HHM]

The reason is, there are other consequences to using retirement than just the numbers of chap 13 vs debt settlement.
1. Penalty cost for early withdraw.
2. Tax consequences for early withdraw
3. For Debt Settlement, the tax consequences of foregiven debt.
4. The fact that you are giving up money set aside for retirement, i.e. (that is money you wont have fore retirement and money that will not be "growing" in your various retirement investments).

It would be RARE that when you factor in ALL the numbers, that cashing out retirement makes the most sense.

[AngelinaCatHub]

I would run the numbers of the cost to settle your debt by using your 401k versus how much you would have to pay in a chapter 13 plan. Once you have that info in front of you, you will be able to make a sound decision on your course of action to rid yourself of your debt.

I know that alot of people on this site are against using your 401k to payoff debt, but if the numbers make sense, I would say that is a viable option. As an example, say you could settle your debt 50% of the balance by using your 401k, when a chapter 13 would cost you 100%. Under that example I would say settling your debt would be the way to go. If the cost of a chapter 13 is less or the same cost as settling, I would go that route. Just my opinion. Hope it helps.

I strongly disagree. The tax and penalty consequence equals very big interest and offsets any sense. This is an exempt item and cannot be levied on even in a suit. To sacrifice your future and at 42 the miracle of compound interest will pay for your bk many times over. You will need a million dollars at 65 to have an average retirement.

You do not know what the future holds about any job. If you need to use a company credit card, DON'T. Pay with cash and get a receipt. The company will reimburse you for it. Once the retirement is gone, as you said, you may lose it all. 'Hub

[UpsideDownMI]

I definately understand your point 'hub. I am saying that it would it be an option if there is a great enough savings to justify it. Under the example that I gave the op would save 30k by using funds from 401k. In that situation, I wouldn't pay a 30k premium just to leave my 401k in place. Like you said you never know what the future holds, but in that situation one should be able to recover much quicker not being tied down in a 13 plan.

Again, this is just my opinion and the op should make their own decision on the course of action to be taken.

FYI, I should clarify that the tax/penalty impact of cashing out a 401k should also be factored into the decision. As you are aware my example did not include that, but it should have.

[zenbit]

Thanks for all the great feedback. I knew I was being a bit short sighted. I wasn't thinking clearly about the *triple whammy* of tax penalties for withdrawing early PLUS tax penalties for settling for less than I owe PLUS losing out on retirement money. This would put me on a slippery slope of no return, I am afraid.

It was precisely this short sightedness that got me into this mess. I have heard nothing except positives about going ahead with a CH 13. Hoping I can break through whatever mental blocks I am running up against and just get on with it.

[AngelinaCatHub]

I definately understand your point 'hub. I am saying that it would it be an option if there is a great enough savings to justify it. Under the example that I gave the op would save 30k by using funds from 401k. In that situation, I wouldn't pay a 30k premium just to leave my 401k in place. Like you said you never know what the future holds, but in that situation one should be able to recover much quicker not being tied down in a 13 plan.

Again, this is just my opinion and the op should make their own decision on the course of action to be taken.

FYI, I should clarify that the tax/penalty impact of cashing out a 401k should also be factored into the decision. As you are aware my example did not include that, but it should have.

Not a problem "'MI". I was there, done that, and this is why I say it like it is, because, (LOL) I have done all the wrong things I am preaching against, inclusive of the 401K, some IRA's and now I still owe IRS 27K.

BUT, I'm happy. BROKE, but happy, and Mrs. is too.

'Hub

[AngelinaCatHub]

Thanks for all the great feedback. I knew I was being a bit short sighted. I wasn't thinking clearly about the *triple whammy* of tax penalties for withdrawing early PLUS tax penalties for settling for less than I owe PLUS losing out on retirement money. This would put me on a slippery slope of no return, I am afraid.

It was precisely this short sightedness that got me into this mess. I have heard nothing except positives about going ahead with a CH 13. Hoping I can break through whatever mental blocks I am running up against and just get on with it.

Hey, Zen', you know, the C13 has the power to reduce the debt. I don't think that it would be taxable as the Creditor is not reducing it, but the Court would be. Even at 100% payback, it is usually not collecting interest and you have five years to do this. I can't believe a Trustee would go for 50K, as he gets a cut and I believe you could handle it. Keep all the rest of your expenses down, and go for it. Yes, and tell the boss. It is a wise business decision and go into his office with pride and explain, I have made a personal business decision that I think you should know about. I have done blah, blah, blah, and then it will be out and over. You will feel better, you won't get fired (they cannot do that legally), and you have nothing to hide. If you are worth your big salary, they won't fire you. 'Hub

[woeisme]

I was also afraid of Ch 13, it was the best financial decision of my life. (Of course being BK, I guess I haven't made a lot of good financial decisions, lol.) But it's seriously not as bad as I had feared. And I thought we'd have to pay 100% at first, but good lawyer found some expenses that I didn't think to claim, got it to 65% payback. Life happened and hubby went on disability retirement so had the plan modified to 40%. It's awesome not being a slave to my credit cards anymore, and I travel for business still. the only thing to fear is fear itself and all that jazz :-)

[2ndChanceTx]

I cleaned out my 401K trying to keep things floating and ended up with a huge tax bill that was the final proverbial nail in my financial coffin... I would go back if I could and not pull that money out.... JMHO