6_401k-bankruptcy-attorney-memphisOne very common situation we see as bankruptcy attorneys is clients who have taken out a loan or early withdrawal from their 401(k) or retirement fund in an attempt to try and pay off their debts. Many of these clients view this as a last resort before considering bankruptcy, but the truth is, the last resort should come before borrowing from retirement.

Borrowing against your retirement is not advised for multiple reasons.


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Depleting your present retirement is not an investment in your future

You’ve spent many hard-working hours to earn the money in your 401(k), taking advantage of a retirement account to do so, and these accounts have many benefits. Many employers offer matching contributions, the money remains untaxed until it is withdrawn, and it lowers your taxable income, meaning you automatically pay less to Uncle Sam when tax time rolls around.

It’s crucial to remember your retirement is also the only money you have that is untouchable – it is protected from creditors even in the case of a bankruptcy. Remember, retirement might seem a long way off right now, and your debts might feel insurmountable. However, your 401(k) should never function as a safety net. You never want to have to pay your way right out of a secure retirement.

The hidden costs of a 401(k) loan

It might seem like a 401(k) loan is simply borrowing from and then repaying yourself. However, there are numerous costs and possible tax consequences associated with early withdrawal.

  1. You’re essentially taxed twice on the loan amount, since you borrow pre-tax money but pay it back with after-tax money. The money will be taxed again when it’s withdrawn at retirement.
  2. If you leave or lose your job with the company where you started your 401(k), you’ll be required to pay back the entire loan amount within 30 days, or face paying income tax on the unpaid loan amount, as well as early withdrawal penalties in some cases.
  3. More pressing is the hit you’ll take on your paychecks – the loan repayments will mean less take-home pay for you.

Bankruptcy can be the better choice

A loan against your retirement may feel like it should come before bankruptcy, but that’s not the case. Instead, consider looking at your personal finances as a small business that needs help to stay afloat. A Chapter 7 or Chapter 13 filing can then be regarded as simply a little bit of personal restructuring.

Your 401(k) is a protected asset in a bankruptcy, meaning it cannot be liquidated in order to pay creditors. Bankruptcy allows you to pay off your immediate debts without having to sacrifice your future retirement security, but it’s very important you speak to an experienced bankruptcy attorney who will be able to help you understand your situation and file proceedings properly with the greatest likelihood of success. Here at Darrell Castle and Associates, we have a team of experienced bankruptcy lawyers waiting to take your call. Before you gamble on your future, give us a call at 901-327-2100 and let’s talk it through. We’re here for you!