Archive for May, 2014

Early 401(K) Withdrawals Replacing Home Equity as Source of Cash

Many individuals today have problems paying their monthly bills, especially if they are in debt or become unemployed. Home equity loans provided the solution for a long time when property values were rapidly rising and when it was easy to borrow against the equity in your home.  The collapse of the housing bubble and the mortgage market crisis in 2008 put an end to the use of the home equity loan as a piggy bank or source of fast money to handle debts or financial emergencies. Now, Newsmax reports that people who need money are instead turning to their 401(k) accounts to get the cash they need. Unfortunately, this is a risky idea for many reasons. 

You should not take money out of a 401(K) to pay back debts, because your 401(K) is protected in a bankruptcy filing. Bankruptcy lawyers in Columbia, SC can help you to understand your options when you cannot pay your bills. If you have already taken money out of your 401(K) in the form of a 401(K) loan, you also need to understand how this will impact your bankruptcy.

The Problems with Tapping Into a 401(K) for Cash

There are a few different ways that you can use a 401(K) loan to get access to cash when you need it. One option you have is to just take money out of the account. This is usually the worst of your alternatives because you will be hit with taxes and penalties, thus losing a good chunk of your investment. If you simply take money out, you also jeopardize your retirement because that money is not in there to grow and provide for your future.

Another option is to borrow from your 401(K) and pay yourself back with interest. You can borrow as much as 50 percent of your vested account balance, up to a maximum of $50,000. If you do not use the money to buy a primary home, you have to pay back the loan within five years. If you leave your job, you will generally be required to pay back the loan in full within 60 days. This is one of the biggest risks of taking a 401(K) loan because if you are laid off or fired, you could be faced with a huge repayment expense at a time when you absolutely won’t have all that extra cash to spare.

Taking out a 401(K) loan is a better choice than simply cashing out your 401(K) but is still going to put your retirement at risk because you could end up just having to cash out if you lose your job. A 401(K) loan is also not going to be discharged in bankruptcy because it cannot be treated as a regular loan.

401(K)s are treated differently depending upon whether you file  Chapter 7 or a Chapter 13, but you generally will need to continue to make payments on the loan and pay it back even after your filing. Your attorney can explain to you how your 401(K) loan will be treated during your bankruptcy filing.

Contact Columbia bankruptcy lawyers at Matthews & Megna LLC by calling 1-803-799-1700.