Why do folks dip into their 401K/IRA's before filing for BK?

[keepsmiling]

My accountant still thinks we should do this. He's just opposed to bk on moral grounds.
Since this is pretty much all we have in the world, and when it's gone it's a cup of hemlock, I am glad I don't listen to everything he says.

[salsa]

Trying to keep things for my daughter, and denial. Stupidity really,

[AngelinaCatHub]

i do need to add one thing here.

when we did go into our 401 it was prior to making the decision to go bk. actually, we had gone to a bk atty up in nj where we were living at the time and he suggested refin and pay downs to get out of the mess we were in. so much for that! but, like i said i knew better and knew the 401 would be protected if we did file. after over a year of bobbing water and already going through the 401 did we file. of course by then it was all gone and too late. it was a last ditch effort, if you know what i mean. not a smart one!

TB43 my good friend, feel not at all concerned about this mistake. When we all came to the point of admission of failure, it was really a great time of reality and learning. None of us BKed on purpose disregarding "working the system".

That being said, you all know my story, and pray you never have the trouble we had. Thank God for this place and I hope many understand that sometimes it is not their fault, but that situations beyond one's control lead us to a remarkable situation. The secret though is, use the "new start" wisely and learn what brought you to this point. Guard against it's recurrence. This lesson no school but 'hard knocks' could teach. Mrs. and I wish all a very Merry Christmas coming upon us soon. 'Hub

[tobee43]

TB43 my good friend, feel not at all concerned about this mistake. When we all came to the point of admission of failure, it was really a great time of reality and learning. None of us BKed on purpose disregarding "working the system".

That being said, you all know my story, and pray you never have the trouble we had. Thank God for this place and I hope many understand that sometimes it is not their fault, but that situations beyond one's control lead us to a remarkable situation. The secret though is, use the "new start" wisely and learn what brought you to this point. Guard against it's recurrence. This lesson no school but 'hard knocks' could teach. Mrs. and I wish all a very Merry Christmas coming upon us soon. 'Hub

thanks hub

i can't wait to crack the volka with you and exchange old bk war stories LOL!!!

[SiftedLikeWheat]

I don't think most people walk around with a working knowledge of bankruptcy laws. I'm almost done with Chapter 13 and still feel in the dark about a lot of things. We dipped into our 401k because:
1) We thought our house would still sell; we had decided to stop paying on the house, then received an offer, so had to continue paying; then the offer fell through
2) BK was not even on the radar when we used the money to catch up the mortgage and pay bills
3) We had no idea whatsoever that the 401k money would have been exempt from a BK, because we were not considering that at that time

To call people ignorant of something they haven't experienced or never dreamed they would experience seems a bit silly. I didn't know a lot about cancer, either, until I had it; then I learned a lot more. I'm still not a physician, however, or a lawyer. It's kind of hard to walk around and know everything there is to know about the world. But then, what do I know, because I'm probably ignorant. Must be, or I wouldn't be bankrupt. No one just has bad luck.

[JackBondLove]

i knew better and STILL did it! why???? because of guilt, etc. now looking back, we so wished we didn't do it. and the really bad part was, it was MY doing, no one elses.

So you felt like you owed it to your creditors to pay them? I guess I have a mercenary attitude and could not care less about them (although if I had cash that would have been confiscated, I would have preferred to have paid off the one nice bank, if it had been possible - but definitely NOT paying them with cash from my IRA!) In fact, by defaulting on the banks, I felt like I got a bit even for the outrageous executive salaries they have been getting (to say nothing of the bailout!)

[JackBondLove]

I took a loan out from my 401k to pay $16K in credit card debt. ... If only I had opened my eyes before taking that 401k loan and filed BK back then! But, at least I've been paying myself 4.5% on that loan, which is a better return than I've been getting on the assets that remain. The loan will be paid off a year before I complete my Chap 13, which will really help make that last year easier.

But that loan went into the coffers of the credit card, right, the debt of which would have been discharged in BK. Or since you did a Chapter 13, you basically would have had to pay it off in any case?

[JackBondLove]

"Never" is such a harsh word.
I took $15K out of my IRA to add to the 12K I had saved up not paying my mortgage for 4 months (which I had to do to get a loan mod) to settle with my second on my house of $180K -- thus paying 15 cents on the dollar. This allowed me to file a chapter 7 instead of trying a 13 to lien strip the second that would have been problematic from an equity standpoint. I now only have a first mortgage 3.5% fixed jumbo loan and positive equity. So I believe it was the right move.

Please explain. Did you reaffirm your home with a lien strip on the 1st? I can't see how settling a 2nd would be worth it if you give up the home.

[JackBondLove]

I don't think most people walk around with a working knowledge of bankruptcy laws. I'm almost done with Chapter 13 and still feel in the dark about a lot of things. We dipped into our 401k because:
1) We thought our house would still sell; we had decided to stop paying on the house, then received an offer, so had to continue paying; then the offer fell through
2) BK was not even on the radar when we used the money to catch up the mortgage and pay bills
3) We had no idea whatsoever that the 401k money would have been exempt from a BK, because we were not considering that at that time

To call people ignorant of something they haven't experienced or never dreamed they would experience seems a bit silly. I didn't know a lot about cancer, either, until I had it; then I learned a lot more. I'm still not a physician, however, or a lawyer. It's kind of hard to walk around and know everything there is to know about the world. But then, what do I know, because I'm probably ignorant. Must be, or I wouldn't be bankrupt. No one just has bad luck.

When I would talk over things with my attorney, he seemed a bit surprised that I knew so much about BK! I guess one of the reasons I had some inkling about what is exempt and non-exempt in BK is that I considered BK briefly in 1997 when I was between jobs (and careers.) I would have only been able to discharge maybe about $15K back then (I was up to date on all my bills, so my credit history was immaculate.) Good thing I worked my way out of that as right after the banks kept on sending my 0% balance transfer offers on new cards, and I worked my way up to $145K in debt, defaulting on $140K of that.

[Resigned2BK]

I, too, dipped into the IRAs a couple times as a means to try to save our house. But this was at a time when I figured we'd have to do bankruptcy but did not know how far off that could be (ended up being another more than 1.5 years from the last dip I did). Plus I thought we'd be able to manage bankruptcy and save the house at the same time, but when DH essentially used my $3K from the last dip to pay on house catch up and used the $3K he borrowed from his parents (while we were waiting for my IRA distribution) to pay money to his creditors to keep current, I knew then and there that I was going to have to force the issue of getting him to see the financial ship undeniably sinking for good! Plus I was never able to pay myself back because the economy just kept hitting us harder and harder all the time. I was fuming about that for a long time but now that we are finally going to file in the next week, I'm feeling more better. Still miffed to have a good $7K or so just flushed down the debt toilet across those two dips, but it's a very important lesson learned very very well for me now.

[AngelinaCatHub]

I, too, dipped into the IRAs a couple times as a means to try to save our house. But this was at a time when I figured we'd have to do bankruptcy but did not know how far off that could be (ended up being another more than 1.5 years from the last dip I did). Plus I thought we'd be able to manage bankruptcy and save the house at the same time, but when DH essentially used my $3K from the last dip to pay on house catch up and used the $3K he borrowed from his parents (while we were waiting for my IRA distribution) to pay money to his creditors to keep current, I knew then and there that I was going to have to force the issue of getting him to see the financial ship undeniably sinking for good! Plus I was never able to pay myself back because the economy just kept hitting us harder and harder all the time. I was fuming about that for a long time but now that we are finally going to file in the next week, I'm feeling more better. Still miffed to have a good $7K or so just flushed down the debt toilet across those two dips, but it's a very important lesson learned very very well for me now.

It takes a lesson like that at times. No one here planned to BK until mistakes or inability to see what the economy is doing to all of us. There is a vast education going on in this Country right now. I worry for our Country now, not just my budget. 'Hub

[tobee43]

So you felt like you owed it to your creditors to pay them? I guess I have a mercenary attitude and could not care less about them (although if I had cash that would have been confiscated, I would have preferred to have paid off the one nice bank, if it had been possible - but definitely NOT paying them with cash from my IRA!) In fact, by defaulting on the banks, I felt like I got a bit even for the outrageous executive salaries they have been getting (to say nothing of the bailout!)

well, i think it was more than that in our case. i was stupidly, thinking i could fix this mess by refin and paying down some of the bills and move forward from that point, of course, using the 401 money to help in that situation.

what we didn't count on was me getting so sick and my other half losing his job, i also eventually lost my job, since i because so sick for so long.

it was from the meeting with the first bk atty, and now i understand it was all a scam. he lead me to the people to refin our house (a 12th hour HUGE mark up on closing costs) we should have walked right then and there. (could of, would of, should of etc.).those were the days when i would go for advise and think these people knew what were talking about and trust them. i should have known better about that also.

it was soon after that, that the quick downward spiral began, and it was then that i developed by attitude about the banks which we had been with, some over 20 years, they treated us like dirt. all of what has come into light today, was not really publicized when we were going through this.

[harris]

Retirement accounts are completely exempted from confiscation in the BK. Is it that folks think that they can avoid BK and think that BK is so bad that it should be avoided at all costs? Is it just simply that folks just don't know? Do folks just fold under the pressure from the collection agents?


Is that true? I was under the thought that it depended on when you put the money into the account. so If you put the money into the IRA on Monday and Tuesday you decided to file for BK that could be a problem. did I misunderstood?

[tobee43]

Retirement accounts are completely exempted from confiscation in the BK. Is it that folks think that they can avoid BK and think that BK is so bad that it should be avoided at all costs? Is it just simply that folks just don't know? Do folks just fold under the pressure from the collection agents?


Is that true? I was under the thought that it depended on when you put the money into the account. so If you put the money into the IRA on Monday and Tuesday you decided to file for BK that could be a problem. did I misunderstood?

well that depends i would think, working at a very prestigious law firm at the time, i was hard pressed to deal with bk. the other person in this house had a very sensitive security type job, which also could be effected by a bk.

this folk not only knew, but did what i could to avoid a bk for a number of reasons besides the guilt, shame etc., all feelings one associates with going bk.

as for us personally , we enjoyed playing with the collectors when they called. one of loved the calls, (sick!), and actually got one in tears, so that was certainly not a deciding factor in any decision we made. for us, we figured we would get back on track, repay our 401, and by the way we also had state pension so, this was just one of our retirement sources, maybe that's why i felt it was a viable option for us, i would simply restore or restock the money once we were in the clear. we made a lot of money for over 30 years, and had no clue this could or would ever happen to us. the day we filed we had over 200k in medical bills alone, we had no clue when we took money out of 401 we would be in the position 2 years later.

[Gonzo]

But that loan went into the coffers of the credit card, right, the debt of which would have been discharged in BK. Or since you did a Chapter 13, you basically would have had to pay it off in any case?

Once she (LadyInTheRed) took out the 401k loan to pay off the credit card, the new 401k loan was now a secured debt and could not be dischargeable in BK. My understanding.