Why not cash out 401 k to head off BK?

[LadyInTheRed]

Thanks for replying, HHM.

I obviously have no self-control, and that feels horrible to admit.

We wouldn't be TOLD by a representative of the Government what we could, or could NOT, do for the next 5 years of our lives, IF I make it that long.

... that's what we face when we give our entire financial life over to the Government....like becoming a ward of the state, living in the Velvet Prison of home. Its like losing our freedom...even if you might say we had essentially lost our freedom anyway because of being tied to those monthly cc payments...but NOBODY was ordering us to do anything, so I feel like that's a big difference.

I've been in Chap 13 for a year and nobody has told me what to do or not to do. I filed a Chap 13 plan and told the court what I should pay to my creditors in the next five years. The court approved my plan. I make one monthly payment instead of several. I don't feel I have lost any freedom. In fact, I have more freedom as I am paying less to the trustee than I was to my creditors. I am putting more in my 401k than I was before I filed.

If you have no self control, what makes you so certain you'll be able to build up your 401k again?

ETA: Stop beating yourself up for your mistakes and give yourself credit for having the wisdom to save for retirement. Don't mess that up.

[JackBondLove]

It's a question of ethics....if you have for example $500,000 in a retirement account and are about to file BK on $150,000 in credit card debt I just don't see how you can sleep with yourself at night.

I BK'd on $140K with $180K in my IRAs, and I sleep like a baby.

[mountanddo]

My company has the same rules.

I don't believe this is company specific. The IRS rules changed on being able to withdraw your 401k or 403b funds unless you were not working there any longer or you retired. There are some rules about hardship loans. You'd have to check on that. But since you are unemployed you don't have that problem. Taking your retirement and cashing it out to pay off only 40% of your debt is not a smart move. I'm 50 and my company puts in 10% off the top but if that were the only thing that ever went in there until I retired at 65 I'd only have about 65k in my retirement depending on the market, could be more - will probably be less. Even if I put an additional 10% in each year it would only be at the most maybe 200k. Right now I can't even hardly pay my chapter 13 so my retirement is going to be more like 100k or less. Even with social security I will be living at poverty level once I retire.

I think you have to get over the shame or guilt you feel for circumstances that put you in this position and don't do something that you will regret for the rest of your life. Sitting around when you are 75 and unable to pay your heat is going to give you no options. If you end up broke when you are 75 are you prepared to go back to work?

Don't do it.

[mountanddo]

yet it almost feels like that's what we face when we give our entire financial life over to the Government....like becoming a ward of the state, living in the Velvet Prison of home. Its like losing our freedom...even if you might say we had essentially lost our freedom anyway because of being tied to those monthly cc payments...but NOBODY was ordering us to do anything, so I feel like that's a big difference.

If you end up having to default on your credit card payments the cc companies can raise your interest rate so high you'll never pay it off, call you constantly asking for money, call your neighbors, your work. Get judgements on you to pay up and garnish your wages. That sounds to me like living in hell. I'd rather live under the trustee's protection, paying an amount that I can live with and still afford to LIVE. No more calls, no more interest and no threat of taking my bank account or garnishing my wages. Being able to protect my retirement. Honestly that doesn't sound like prison to me. and that's only if you are in a chapter 13. It sounds like you can swing a 7 which means that in less than 6 months from now you will have gotten rid of your debt and saved your retirement. That would be enough for me to sleep at night.

[AngelinaCat]

First, I know this is generally VERY Frowned upon by financial advisors. I get that. But read on.

Spouse and I are mid-40's. We intend to keep our house and live here forever...we have been here almost 10 years already, but just re-fi'd (for the 2nd time) last year to get lower rate and lower payment. So we have 29 years left on mortgage. We took out our equity in a re-fi 3 years ago to consolidate bills and lower cash outflow. So we do not have a 2nd mortgage, but also no equity in house, and the actual value is under what we owe. But since we plan on staying here, that shouldn't matter.

I am unemployed, and cannot resume my past career, but intend on doing something else when I can figure out what something else is, and spouse has a solid and basically safe career in medical.

Eventually, we figure real estate will come back, and since we plan on staying here, we will have significant equity in the home after 20 years of stability and payments.

We can also start a new 401k after we cash out this one, right? Or am I wrong on that?

So what is the harm in cashing it out now to prevent BK?

I know there is a 10% penalty, plus significant Tax implications. But it would save us for now. We couldn't pay off ALL of our unsecured with it, but we could knock out maybe 40% of it and catch up on whatever cc's we are behind on.

Note...we have NEVER been late on a house payment or car payment, and intend to continue paying those as normal even if we do a BK13.

Is it foolhardy to contemplate this 401k liquidation plan instead of bk13?

Because it is only a stop-gap measure and will NOT stave off the need to file BK. You would be taking an item that is exempt in BK, and basically throwing it down the toilet, Then you get saddled with the 10% IRS penalty. We are STILL paying off our IRS penalty. We could certainly use that money now.

And, do not ever think that you will have the time to replace and make up what you had in your 401k. Life has a nasty way of rearing up its ugly head and smashing your face headlong into it. When 'Hub and I went out from our motel room today to visit his old territory in Dayton, OH, we had no idea that I would end up in the emergency room of the Miami Valley hospital with a possible broken back, but I did.

Thank you Lord, that I am okay, and it was a bad scare. But I am now facing months ahead of hospital bills for the emergency room, xrays and a CT scan, for which we have very little insurance or funds to pay for.

Leave your 401K ALONE!!!!

[AngelinaCatHub]

Alorth, my dear. If you even think of sacrificing an 'untouchable' asset as your retirement, you are nutz. Have I been to the point?

WE as I am Angelinacats husband, can attest to stupidity as well as ignorance. Do you know the difference? We have learned the hard way so let me explain: We were ignorant, our net value on paper with lands and monies was 10.5 mil. Got that??? I had a bitty bitty 250K in a 401K. Being that we gave our wealth away as in land, we have no progeny to leave it to. We wished it to go into a Public Park in which it did. Having plenty of money in the bank, I ended with a pizzing contest with an adversary who now had more money than I. We had enough to live a standard of retirement anyone would love. I was "WIPED OUT" and with a credit score of 820, just about near the max, it was very difficult to sacrifice. After a quarter million into lawyers and no prospects of end, we liquidated this as I was past 59.5 in years. So, that was gone.

I got by as ignorant as I was in bk as we never expected to be in this mess.

At this time, we are on Govmint dole re; Social Security, and a very small Trust retirement fund. The 401K would have made us less worried about day to day concerns.

We are very pleased with all we did in our life. Including what we learned in bk. Do not fool yourself. Pride does go before your fall. Remember this. I have read every word here and if you wish to know the definition of ignorant as we knew nothing, or STUPID, as you know but have a "pride wall" problem, doing what everyone but one or lets say 90% are telling you don't commit financial suicide. That my dear, is the definition of STUPID. Sorry, I tell it like I see it. I wish you well, do what your heart tells you, but have your heart consult with your mind first. Best of luck. 'Hub

[LadyInTheRed]

Alroth already filed BK. So, there is no need to talk him out of invading his 401k. But, the information is helpful to others who come across this thread.

[mountanddo]

Ok, well after I looked into his posts I realized that he already filed chapter 7 and is in danger of becoming a chapter 13 which is really what his post is about. After going back and re-reading your posts it sounds more like you are angry that you might have to be in a chapter 13 rather than a chapter 7. So because you don't want the government to tell you how to live financially for the next 5 you want to spend your retirement to avoid that. I'm actually kinda ticked because I felt bad because I assumed that you were just against bankrupcey because it made you feel like a loser or you would have too much guilt and here we are trying to make you feel better. I guess you didn't have these same feelings when you filed a chapter 7.

[keepsmiling]

Hey MD and others,
The original post is over a year old. OP has had time to rethink his original ideas from when BK was first crossing his mind, so don't be ticked with him. Someone else dredged this old thread up.

Lots of good food for thought tho.

[mountanddo]

I wish people would stop replying to old threads. It is hit and miss that the dates show up. I used to use IE until someone mentioned that the dates show up on Google Chrome. Well, that stopped working about 2 weeks ago and I went back to reading the forum in IE. Now today I see that the dates are showing up again. Vbulletin really needs to fix this!

[AngelinaCatHub]

Hey MD and others,
The original post is over a year old. OP has had time to rethink his original ideas from when BK was first crossing his mind, so don't be ticked with him. Someone else dredged this old thread up.

Lots of good food for thought tho.

Well I guess I did not read every word. I did not know the date had changed. I have this software but have yet to investigate it. There must be away that an old thread could auto lock after no activity for a set time so these old posts die. At least the vein of the threat may have some educational value as LIR said. 'Hub

Liquidating 401K, the stupidest thing I ever done.

[tradinglife]

Been there, done that, and got the tee shirt. Liquidated my 401k to catch up my house payment since I could not my loan modified, ended up letting the house go back in the BK 6 months later. Man wish I could go back in time and change that decision, lol. Funny thing is lender is wearing me out a year after we moved out of house to work with us to modify loan. If they had been that accomodating when we were needing help, things may have worked out different. So here I am 46 and broke, living in a rent house with no 401k, very humbling from where I was at 5 yrs ago. They say if an experience doesn't kill you it will make you stronger, I know at the least I am wiser now for sure.