Borrowing Against Retirement: Using Your Future To Pay For Your Past

14 Nov Borrowing Against Retirement: Using Your Future To Pay For Your Past

Borrowing against your retirement to pay off credit cards and other unsecured debts may be a big mistake. South Carolina attorney Dana Wilkinson wrote an article on a new 401k debit card that is being offered that makes it easy to access and spend 401k funds. For anyone who is thinking about taking money from a 401k or IRA or any other retirement plan, Dana gave excellent advice. “In a word, no. In fact, no, no, No, No, NO!”

The use of retirement funds is a bad idea for many reasons. First, there usually isn’t enough money to pay off the debts. Many times, all the loan does is get a person’s debt payments under control, but it might just be a temporary fix.

Then there is the problem with taxes. Even if taken in a loan form, one must be aware that if they default on repayments of the 401k loan or they leave their job, most retirement loans must be repaid if the employee is no longer employed with the plan employer, or they must pay the taxes and penalties.

If taxes are not paid, the individual is left facing an even worse problem than overdue credit cards: unpaid taxes due to the Internal Revenue Service.

Finally, if someone uses up their retirement plan while they are young, there will be nothing left to retire on.

Most retirement plans are protected from creditors. The money in them is seen as so vital for their future that there are laws that prevent creditors from taking that money, even in bankruptcy.

So before you tap into those protected funds, talk to an experienced bankruptcy lawyer. If you are in a position to make payments, you might be better off in a Chapter 13 bankruptcy case. In Chapter 13, you will make payments if you can. However if things get worse you won’t be stuck with a 401k loan you can’t repay – or the taxes/penalties. In Chapter 13, you may be able to lower your payments or write them off entirely in Chapter 7 – and your retirement funds will still be safe where they should be. In your 401k.

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Concentrating in Consumer Bankruptcy Law since 1988; Wake Forest Law School JD 1987 Law Office of Susanne M. Robicsek since 1993, Law Clerk to Judge Rufus Reynolds, US Bankruptcy Judge for Middle District of NC; Burns Price & Arneke, PA, David Badger and Associates, PA.

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