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

[JackBondLove]

I've noticed that AngelinaCat, tobee43 & wallstreet (please inform me if I'm inaccurate here) all dipped into their 401K/IRA's prior to filing for BK. I'm trying to understand why folks would do this, rather than just filing for BK right then and there - or at least just not paying off any debt until such time as the filing would be done. 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?

In my case, I saw the swirling of my finances down the hole and resolved that I would exhaust my non-retirement assets (since they COULD be confiscated in BK) at which time I would file for Chapter 7, only dipping into those accounts AFTER filing. It seems to me that everyone in a "negative cash flow position" should know this.

[spidge]

I kept borrowing and doing hardships to save my home, but as you said I should have just filed from the early signs of hopelessness. This would have left me with much more than I currently have in my 401K and I would feel much better. The only expense I used it for was to pay off a car. I failed to discover this and other good sites before many of my mistakes in preparing to file BK. Its water under the bridge now and we are in fairly good shape currently.

[AngelinaCatHub]

I've noticed that AngelinaCat, tobee43 & wallstreet (please inform me if I'm inaccurate here) all dipped into their 401K/IRA's prior to filing for BK. I'm trying to understand why folks would do this, rather than just filing for BK right then and there - or at least just not paying off any debt until such time as the filing would be done. 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?

In my case, I saw the swirling of my finances down the hole and resolved that I would exhaust my non-retirement assets (since they COULD be confiscated in BK) at which time I would file for Chapter 7, only dipping into those accounts AFTER filing. It seems to me that everyone in a "negative cash flow position" should know this.

Jack, I'll be pleased to tell you our reasons (Mrs. and I). We never ever considered bankruptcy and were awash in monies about 12 years ago. We (having no heirs to pass our land down to) our family farm since 1860 was gifted to the State of Florida for a Wildlife Easement and Public Park. 200+ acres. The State built a wonderful Park and we have life rights to it's full use at anytime. 22 more acres are on a major river and we held a life estate on this portion.

This is what saved us in bankruptcy as shortly after, we became involved with a very mean money changer and eccentric millionaire who through 9 years of serial law suits over a pizzing match that I won't go into, cost us our residual cash, and also I became a member of the big "C" club. This man involved even the FBI into our business and caused his partner to become disbarred and another good friend who lost his job getting caught manufacturing false evidence against us. (he was a Sergeant Detective) Nothing went to Trial but our money. We paid four lawyers a quarter of a million and never won or lost except our money.

The adversary caused our three jobs to become poisoned so we lost them and then we were forced to BK. Then he even presented an Adversary Procedure against our BK. Caused us total financial loss except for an income from a Charitable Remainder Unitrust that we get a year draw from. IF we had not previously gift our land, he would have owned it for sure. If we did not have the Trust we would have been destitute.

The State cannot accept a gift so they "Had" to pay us something which was less than 10% of it's value. One million dollars in which I insisted to clear all debt on the mortgages and disallowed any borrowing rights in our agreement. We then did not need the money so it went into the CRUT. In the later nine years we were forced to liquidate my small 401K at a penalty of course. I was 59 1/2 so it was not too bad.

So, that is my reasons and probably would not be reason of anyone on earth for the similar situation. We all have our reasons why we do stupid things. We were Sooo ignorant about BK and if I knew then about it, I certainly would not have liquidated an exempt item. All in all, for what we have learned about money, the lack of it, and new values, we would not choose to change a thing in our lives as we have learned far more about what really counts than being "well off". We are far more wealthy being broke now than when we had bucks. Happiness is a state of mind. You choose your day everyday you rise from bed. If you choose depression, you will be depressed. We choose happiness for what God allows us to have day to day. "Our Story" 'Hub

[HHM]

It is too bad when you hear of someone dipping into 401(k) as opposed to BK. There never is a "good" reason, it is done out of survival instinct, pride and denial.

The only debt for which a 401(k) should be liquidated is to pay a non-dischargeable tax debt if you have exhausted all resolution options to no avail. Reason being, 401(k)'s, IRA, etc are not exempted from IRS levy.

[BKAttyMI]

I find most people take out these large loans or withdrawals in an attempt to "not" file for bankruptcy, usually to terrible consequences. People just don't know.

[AngelinaCat]

There was no excuse for us--just plain ignorance. I have a TIAA-CREFF account that was created when I got my first job more than 35 years ago. It was set up in such a way that I can't touch it until I am 59 and a half. Thank God I couldn't, or it would have been raided. It now has a tidy sum in it.... if the markets don't fall any more.

[AngelinaCatHub]

I find most people take out these large loans or withdrawals in an attempt to "not" file for bankruptcy, usually to terrible consequences. People just don't know.

How true BKA. This is why we are devoted to this forum. We just did not know. When we were flush in funds, it was nothing to help a friend with a hundred dollar check. The person (I have one in mind) usually dug their hole again so the "gift" never helped them. Now that we are living on SS, a small pension and a small draw that pays our taxes and HSA, our "GIFT" is our time here to help those who were/are as ignorant as we were. I'm not saying I'm an authority, but today I feel I could pro se no prob. Our intent here is to learn enough to aid those who are about to make any mistake we made. That would cover almost everything we could possible do wrong in a BK. Cost us 10K extra yet our bk was not dismissed as others have been for far less errors than we made. I think our Trustee and UST saw our errors as what they were, not dishonest just stupid. LOL.

We were blessed with our discharge and finally a Close and the AP was dismissed for non prosecution. Finally on April 1, (all fools day) my enemy dropped to a massive heart attack, never recovered due to renal failure and 13 months later passed of a stroke. He was a devout Atheist, and threw the word "Karma" at me. I do believe in Karma, but I call it Justice for your own actions, good or bad. He died of Karma. 'Hub

[tobee43]

I've noticed that AngelinaCat, tobee43 & wallstreet (please inform me if I'm inaccurate here) all dipped into their 401K/IRA's prior to filing for BK. I'm trying to understand why folks would do this, rather than just filing for BK right then and there - or at least just not paying off any debt until such time as the filing would be done. 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?

In my case, I saw the swirling of my finances down the hole and resolved that I would exhaust my non-retirement assets (since they COULD be confiscated in BK) at which time I would file for Chapter 7, only dipping into those accounts AFTER filing. It seems to me that everyone in a "negative cash flow position" should know this.

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.

[keepsmiling]

I was all set to do it and then I found youse guys. Didn't know I didn't have to.

[tobee43]

I was all set to do it and then I found youse guys. Didn't know I didn't have to.

and i have NO excuses!!! shame on me!!!

[Gonzo]

Remember, we don't hear about the many people who borrowed from their 401K and resolved their problem. I once had a client who was stark-raving mad about accumulating funds in his 401K. But he wasn't leaving himself enough income to live. He got enjoyment out of logging on and watching his account grow. Checked it every night. It had grown to $500,000.

Then his wife finally convinced him how crazy it was getting. They eventually took money out, reduced the ongong contribution and got themselves together.

There are so many options in life. The choices made depend on individual circumstances. Some people with security clearances and other credit-sensitive jobs cannot have a BK show up anywhere. Most casino workers could have a problem if they file a BK. Still other people don't want their info in the public record. With our personal and financial info a click away on Google, that's uncomfortable for some people.

And just like many things in life, we may start out thinking Plan A is gonna work, but it doesn't. Might end up with Plan D.

Then there are those who have a personal or moral distaste for BK. Different strokes for different folks.

[LadyInTheRed]

I took a loan out from my 401k to pay $16K in credit card debt. I had been playing the balance transfer game. My introductory rate had expired on one card and the attractive balance transfer offers had stopped arriving in the mail. I was not going to be able to make the new minimum payment when my rate went from 0% to 19.9%. I really didn't see how much trouble I was in at that time and bankruptcy never entered my mind. A big portion of my credit card debt was at 2.99% until paid off, so I thought I was okay.

It wasn't until a year later when my 5 year fixed rate, interest only period on my mortgage expired, that I realized I was in trouble. Even though the interest rate was going to go down, adding principal to the payments was going to make them too high. I also had another 0% introductory rate expiring on a $20k balance CC at the same time. I started looking at mortgage modification options and found out that I made too much money to qualify for a modification and they didn't care how high my credit card payments were. But, I still thought the mortgage was the main problem. While researching options for dealing with my mortgage, I somehow stumbled upon Bkforum. Reading this board helped me realize that, while the mortgage was a problem, my biggest problem was credit card debt. When I learned I could strip my underwater 2nd mortgage, there was no doubt that bankruptcy was my solution.

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.

[tobee43]

I took a loan out from my 401k to pay $16K in credit card debt. I had been playing the balance transfer game. My introductory rate had expired on one card and the attractive balance transfer offers had stopped arriving in the mail. I was not going to be able to make the new minimum payment when my rate went from 0% to 19.9%. I really didn't see how much trouble I was in at that time and bankruptcy never entered my mind. A big portion of my credit card debt was at 2.99% until paid off, so I thought I was okay.

It wasn't until a year later when my 5 year fixed rate, interest only period on my mortgage expired, that I realized I was in trouble. Even though the interest rate was going to go down, adding principal to the payments was going to make them too high. I also had another 0% introductory rate expiring on a $20k balance CC at the same time. I started looking at mortgage modification options and found out that I made too much money to qualify for a modification and they didn't care how high my credit card payments were. But, I still thought the mortgage was the main problem. While researching options for dealing with my mortgage, I somehow stumbled upon Bkforum. Reading this board helped me realize that, while the mortgage was a problem, my biggest problem was credit card debt. When I learned I could strip my underwater 2nd mortgage, there was no doubt that bankruptcy was my solution.

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.

please everyone NOTE: see it happens to the best of us at least i was good company! LOL!

[msm859]

It is too bad when you hear of someone dipping into 401(k) as opposed to BK. There never is a "good" reason, it is done out of survival instinct, pride and denial.

The only debt for which a 401(k) should be liquidated is to pay a non-dischargeable tax debt if you have exhausted all resolution options to no avail. Reason being, 401(k)'s, IRA, etc are not exempted from IRS levy.

"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.

[tobee43]

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!