It happens to the best of us. People get sick. They fall behind. One bread winner in the family loses their job, and then the unemployment checks stop coming. The phone starts ringing. Your creditors want their money, and they want their money now. They will suggest anything to get you to pay them. Just like you, they have kids to put through college, and they often work on commission.
There are a lot of legit things to try when dealing with the stress of debt collection. You can cut back on lattes, you can take fewer vacations, heck, you can even get a second job slinging coffee (and get a discount on lattes).
But please don’t cash in your 401k.
Here is why.
First, if the costs of doing so are huge. Between the penalties and taxes on the withdrawal, your real cost of the money is considerably higher than what your creditor will get.
Second, if you are upside down on your monthly expenses, it is very likely that paying off one creditor is not going to solve any problems in the long run. AND it is VERY likely that in the event that you must file bankruptcy, your 401k is exempt from being taken by your creditors. By cashing in your 401k to pay creditors, you are giving up your rights under the law. You have a responsibility to yourself, your family, and to society at large to do your best to care for yourself in retirement. Cashing in your retirement savings to pay off some bills that can be dealt with through the courts short changes everyone, and it only benefits the banksters.
Finally, in most instances, creditors who suggest this practice are offering you a discount to ‘settle’ the debt for less than its face value. This may seem like a great deal, but settling a debt for less than its full value can be a taxable event. You may be in for a suprise come next January, particularly if you are in a higher tax bracket.
Do yourself a favor. Before you yield to the temptation to cash in your retirement savings, or even a big chunk of it, check around. Talk to credit counselors, or talk to a bankruptcy attorney. Your kids will thank you.
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If you are a resident of Snohomish County, Skagit County, Whatcom County or Island County, Washington, you can speak with a professional who understands your situation. Contact me to schedule a free consultation to see if bankruptcy is the right choice for you. There is no obligation, and no pressure. I have weekend and evening appointments available, and if you decide to move forward, I offer a reasonable payment plan.Duane Dawson Dawson Law 17020 Twin Lakes Ave #C105-510 Marysville, WA 98271 Everett, Marysville, Lynnwood, Edmonds, Lake Stevens, Arlington, WA: 425.405.5750