401K Withdrawl

[JY3684]

I am looking for some advice if anyone can help me. I owe approx. $13,500 to a major credit card company. The account is already a charge-off and their collection agency has filed a civil claim against me.

I would like to avoid filing Chapter 13 if possible. The most painless, short-term option I see is to take a hardship withdraw from my 401K. However, this does not qualify as one of the 6 IRS reasons for a hardship withdraw.

I understand if I make the withdraw request for home repairs or an approved reason, the IRS could potentially request receipts for those repairs, and if the money was used on something else there could be additional fines. Has anyone done this before or know the likelihood of this withdraw being audited? Does anyone know what those additional fines might be? If it's only another 5%-10%, it would probably be worth it to me.

Also, I have enough available balance on another card to pay this off via a balance transfer check. However, you can't make a balance transfer to a law firm. I haven't dealt with the credit card company in almost 2 yrs while this has been pursued by their collection attorneys. What would happen if I sent a balance transfer check directly to the credit card company for the full amount? Would they even accept it? Would collection efforts then cease?

Would appreciate any good advice.

[HHM]

Before you go down this route and use an otherwise exempt asset to pay off a card...even if you pay off this card, what is the likelyhood you would have to file some form of BK in the future (be honest and be realistic). I wouldn't throw away an exempt asset for a "short term" stop-gap measure.

I would say that...if, based on your current assets and income, if you couldn't pay off all your unsecured debt in 5 years, then I would NOT make the withdraw.

How much total "unsecured" debt do you have right now?

[JY3684]

I don't foresee having to file for bankruptcy in the future, considering I have never been unemployed, have no other bad debt, and have never been behind on payments of any other kind.

I made a poor decision with this particular debt and I am trying to find the best resolution for paying off $13K that I don't currently have in my checking account.

I would prefer not to take out a loan at 30% and spend all of my discretionary income for the next 5 years paying that off. I would prefer not to refinance my mortgage. I would prefer not to make a balance transfer and max out a credit card that currently has no balance, but I can do that at a 4% interest rate. But I don't know if the creditor would accept a balance transfer check from me since the account is a charge off and in collection.

If I can use money from my 401K, that would be my preference because I have 30 yrs left in my career to make that back up. However, if the IRS audits the loan and there's a 50% or greater penalty, that's probably not a route worth trying.

I would just like to get these lawyers off my back without having to retain my own counsel, and settle the matter as painlessly as possible, understanding there will be some pain.

[Grace]

You cannot withdraw the money from your 401k for any reason other than the ones you've already researched and discovered you don't qualify for. Lying to your company and the IRS would be a very, very bad idea.

If you want to tap your retirement to pay off credit card debt, you have to take out a loan. You'll lose years of compound interest you can never get back. If this is the only thing keeping you from bankruptcy and you've already adjusted your lifestyle to accommodate a reduction in income, then maybe a 401k loan makes sense. Otherwise, you'll just end up in more financial trouble.

[JY3684]

Grace,

I appreciate your response, and I don't mean this to sound impolite, but I wasn't asking for retirement planning advice or whether it was a good idea. I'm trying to obtain information on options. Specifically on a 401K hardship withdrawl, I'm trying to find out what the penalty is for using the withdrawl for something other than an IRS approved safe harbor, and what is the likelihood of that withdrawl being audited. I'm guessing if the withdrawl is audited, it would be done as part of an audit of my 2006 full year tax returns, which wouldn't have any other red flags.

I am also wondering if anyone knows if a creditor will accept a balance transfer check once an account has already been charged off and is being handled by their collection attorneys.

Thank you.

[FoolAndHisMoney]

[CindyLou]

I agree. Leave your 401k safely tucked away and pursue other options....even a second mortgage on your house would be better. The interest is then tax deductible. Your chances of being audited for a "hardship" withdrawl, I would think is much greater than normal. This might just BE the red flag. And yes, once you add on penalties and interest you would be in for over at least 50% if you count the taxes and penalties you'll pay now for doing it. If audited, it may not be until 2 years from now and the additional interest and penalities will just not be worth the risk. Even though I usually against it, even a loan on the 401K would be better. Not real smart, but at least legal. Good luck and keep us posted.

[HHM]

Grace,

I appreciate your response, and I don't mean this to sound impolite, but I wasn't asking for retirement planning advice or whether it was a good idea. I'm trying to obtain information on options. Specifically on a 401K hardship withdrawal, I'm trying to find out what the penalty is for using the withdrawal for something other than an IRS approved safe harbor, and what is the likelihood of that withdrawal being audited. I'm guessing if the withdrawal is audited, it would be done as part of an audit of my 2006 full year tax returns, which wouldn't have any other red flags.

I am also wondering if anyone knows if a creditor will accept a balance transfer check once an account has already been charged off and is being handled by their collection attorneys.

Thank you.

Also too, realize, your asking a fairly complicated tax question in a forum more dedicated to bankruptcy and credit issues. So no one here could probably tell you one way or the other...and also too, no one here is really interested in helping you commit tax fraud.

Plus, withdrawal doesn't make much financial sense, even for a hardship withdrawal, you still have to pay a penalty of 10% of the withdrawal PLUS regular income tax. So, assuming a conservative tax bracket of 25% (meaning you earn roughly $30K-$62K annually), and you withdrawal your $13,500, you will only get $8,775.

Also, an employer is not required by the IRS to even grant the withdrawal. First, do you know if your employer allows it, if so...do they require "Proof" of need, or use a self certification program. The difference being that if it is Proof of need, you are allowed to contribute to the 401K right away, if its self certification, you cannot contribute to your 401K for six months.

You want to know if you can "get away with it", and we are telling you, that even if you could, it is terrible idea.

As to the balance transfer checks, they are just like any other check, so I don't see why they wouldn't accept it. Really, they don't face much risk because a balance transfer from one creditor to another is not a "preferential payment" so the company getting the check almost always can keep the money. If that is how you want to settle it, send the check. The worst case scenario, they send it back. This situation only gets dicey in the Bankruptcy context, but it is the Debtor (you) who may have to pay back the creditor who issued the check that you used to pay off the other creditor.

[SinkingFast]

Ditto's here.

You maybe could get away with a SOB story explanation about an early withdrawal. Maybe not. Why risk it??!! We're not talking millions of dollars here where you could flee the country and never have to come back. Relatively speaking, this is a small amount to risk worth going to jail for. Lieing about the Hardship is perjury.

Also, if you borrow against your 401K and loose your job, the loan may become immediately due and payable. Many companies do not allow for the original terms of the note to stand with 401K loans. When you're terminated, they want the money put back immediately. So that's something to consider as well.

Personally,.............. I would not borrow against the equity of your home to pay the debt. That's converting unsecured debt into secured debt. What if your position is Terminated or Transfered and you HAVE to sell to move??!! You may need wiggle room in a tight situation just to get out of the house quickly.

Of the options you presented, I'd take the Cash Advance at the low interest rate. Write the check to yourself. Deposit it into your personal acct. Wait a week or so for the funds to clear. Get a Cashier's Check or Bank Draft, or whatever your Bank calls it, written to pay the debt. I doubt the Creditor would refuse a Cashier's Check written on a Bank. The funds are there backing the check and the Creditor knows it.

As FAHM said, none of us has a crystal ball, but we've been where you are. Standing at a financial crossroads, having to decide what to do. Many of us made decisions hoping for the best and got the worst. We took HELOC's and lost our jobs. We borrowed against our retirements and lost our jobs. You name it, it's happened. And it cost us big time.

Just my $0.02 worth.

[CindyLou]

Well said Sinkingfast!!! Great advice. I would certainly do that!