Obliterate the 401k to drop second home...or File a Ch13

[anonxyz]

I bought a house at the height of the market years ago so that both myself and my parents would have a place. Within a few years, it was worth $100,000 less that what was owed and the monthly payment was insane. The bank didn't want to work with me, so I eventually made a "calculated" decision to buy another place while I could (good job, some money in the bank) 3 years ago. I did this because If I sold the first house and emptied all of my accounts to pay off the note, I'd have zero left and have to find a place to rent.

Now, I'm at the point where they are looking to foreclose, so I need to move on a decision...and I'm having some serious questions on which way to go. maybe someone here was in a similar predicament and went one way or the other?

Option 1. File the Ch 13 for the sole purpose of getting out from the second home and keeping my primary.

Option 2. Cash out my 401k (with all fees and penalties) to pay the $60,000 in back payments owed to get current on the loan and use the rest to pay off the note when they house sells.

I really don't know anymore. I mean the Ch 13 is going to hurt pretty bad as far as future loans, background investigations for jobs, etc. I lose my 401k but it avoids any bankruptcy and probably better fro my credit and job status in the future. Btw I'm 37.

Maybe someone has had a similar situation? The advice and input is appreciated. Lots of good stuff on this forum.

Thanks for listening.

[leonel9]

For option #2, what will you do with the home after you bring it current? Just sell it? You've already mentioned that it's upside down. Have you factored the cost of selling it (tax, commissions, possible seller concessions)? Or do you plan to rent it out? Spending $60k+ on a house underwater seems like a bad idea to me, but additional info. may help.

Other thoughts:

• Do you have any other debt that you would be including if you filed bankruptcy?
• Have you performed a means test calculation to determine if you qualify for a Chapter 7?
• Have you explored a short sale or deed in lieu of foreclosure? (I assume you attempted a modification)

[anonxyz]

Half of my 401k (after penalties) would bring the mortgage current and the other half would essentially cover the deficit after the sale....give or take. The monthly payment is pretty crazy so I don't think I could get that much for renting it. My parents are in it now, but they've had some stuff happen in the last few years which is why I'm so behind......they can't make the payments to me.

As far as other debt, in about a month I will have enough saved to pay off all of my debt excluding the underwater house. So the idea is if I file a ch 13, it's solely to get out from the underwater house. I pay off all of the other debt within months and push for an early dismissal. I'm not looking for any reductions in credit card debt or student loans. I'll just pay it off.

I would definitely file a ch 7, but they would snatch my other house in a minute, especially since it has equity

They won't modify unless it's my primary residence. The short sale or deed-in-lieu seems like another viable option but the grey area seems to be they hurt my credit pretty significantly and on top of that, I'm paying the taxes on the deficit. But idk, maybe that's a better road to take.

[eich74]

Just a thought here as I am not sure if you have considered or looked into it, but if you are still employed at the place that has your 401k you can't cash it out. You would be able to take a loan against it or a hardship withdrawal. In most case when taking a loan your 401k administrator will set limits on how much you can borrow. Mine is a 50k limit or 1/2 my vested balance, which ever is lesser.

If you no longer work at the place where your 401k was, then you would have full access to cash it out, however you would be hit with a 10% early withdrawal fee and pay taxes on what ever amount you cash out. Some 401k administrators require the taxes be taken out of the balance before sending you a check, while others let you handle paying the taxes at tax time.

Some things to consider if you hadn't already.

[anonxyz]

Just a thought here as I am not sure if you have considered or looked into it, but if you are still employed at the place that has your 401k you can't cash it out. You would be able to take a loan against it or a hardship withdrawal. In most case when taking a loan your 401k administrator will set limits on how much you can borrow. Mine is a 50k limit or 1/2 my vested balance, which ever is lesser.

If you no longer work at the place where your 401k was, then you would have full access to cash it out, however you would be hit with a 10% early withdrawal fee and pay taxes on what ever amount you cash out. Some 401k administrators require the taxes be taken out of the balance before sending you a check, while others let you handle paying the taxes at tax time.

Some things to consider if you hadn't already.

I'm consulting right now, so the 401k is from a past employer. I figured the balance after taxes plus the 10% penalty. But thanks for the heads-up.