Why take the risk of a 401(k) loan when you can find better debt relief with Chapter 13 bankruptcy?
When faced with growing debt problems, people sometimes scramble to throw all available assets towards repayment. However, this is not necessarily the best option in every case. Before you tap into your retirement accounts to pay off debts, you really should consider all your options, including bankruptcy. In many cases, declaring Chapter 13 bankruptcy can provide a much better long-term solution to debt problems than cashing out or borrowing against your 401(k).
Disadvantages of 401(k) Loans
Sometimes it can be very tempting to see your 401(k) as just another stash of cash that should be available whenever you want it. However, in reality your 401(k) is designed specifically for retirement savings, and the government has created some pretty strong incentives for you to use it as such.
It is possible to take out a loan against your 401(k). If you can get a low interest rate on your 401(k) loan, it might be worthwhile to take out the loan in order to repay a high-interest debt. However, you need to make sure that the amount you will be saving on interest by repaying that debt faster is worth the risk of tapping into your 401(k).
If you fail to repay your 401(k) for any reason, you will be subject to income taxes on the amount of the loan as well as a 10 percent early distribution penalty if you are not yet 59.5 years old. These expenses could negate the benefit of taking out the loan in the first place if you’re not careful.
Don’t just assume this won’t happen to you! There are many reasons why you might be unable to repay your 401(k) loan, some of which are not under your control. For example, maybe your employer goes out of business or you have to quit your job suddenly and relocate for family reasons. If this happens, your loan will usually come due in full within 60 days of the termination of your employment and chances are you won’t have the cash to repay it.
Bankruptcy Provides an Alternative
Many people have such a horror of debt that they will do anything to avoid it, including putting their retirement at risk. What they don’t realize is that there are other routes out of debt that will allow them to keep their retirement savings intact.
The Chapter 13 bankruptcy or wage earner bankruptcy process is a good example of an alternative to liquidating retirement assets to get out of debt. In this kind of bankruptcy, your debts will be consolidated into a single court-sponsored repayment plan that will last 3 to 5 years. Your payment will be set by the court based on what you can afford, and you will not incur any further late fees or penalties during the process.
Best of all, almost all of your assets will be exempt from the Chapter 13 bankruptcy proceeding. This includes over $1 million in exemptions for your 401(k) and IRA.
Please contact California Bankruptcy Relief for advice before you take out that 401(k) loan! We just may have a better alternative for you.
