Tapping into a 401k to avoid Personal Bankruptcy in New York is crazy…
Look folks. We have to face some facts here. If you’re making $45,000 a year and have a family, and you have a rather large amount of credit card debt in New York, tapping into your 401k and/or IRA to pay off a partial amount of the debt is a bad idea. I know critics will say “It’s your debt, you earned it, and if you have the money you should pay for it.” I get it. But if we all listened to such sage advice then Lehman Brothers would still be here, and banks wouldnt have their hands out because they ALSO took on way too much debt. It happens and we need to move on from this higher than thou thinking.
The point is this: The money that you saved your entire life should be there for you when you retire. The 401k and IRA funds that you’ve worked for need to remain untouched if you plan to retire someday (putting aside the fact that the Stock Market has tanked). If you have 50k in credit card debt and you take out a 20k loan against your 401k to pay for it, you’re losing on both ends. First, you’re not paying off the remaining $30,000 on a normal salary (especially if you’re interest rate is close to 15%-25% plus late fees, etc.) That balance will continue to grow until it hits 50k or more again. Second, what happens if you can’t repay that 401k loan? Now you have a ton of debt AND are going to have some issues retiring. Finally, the tax hit is quite large.
The solution to your issues with debt is not trying to pay it “partially down”. If you can get rid of all of it and still be able to retire then great, but if you’re going to have issues down the line then keep the money where it is. I am not AT ALL saying that you should keep piling on credit card debt. What I am saying is that if you find yourself in a bit of a credit crunch and are strapped for cash, don’t go into your retirement piggy bank. There are other ways out of this mess than will not involve you working well into your 90’s.
Daniel Gershburg Esq., is a Bankruptcy & Real Estate attorney serving clients in Brooklyn, Queens, Manhattan, Staten Island, Long Island and Westchester. Mr. Gershburg has given lectures and presentations to both attorneys and the community at large surrounding Bankruptcy and financial advocacy in the New York City area. He is a proud member of the National Association of Consumer Advocates. Currently he is working on his first book giving practical advice about repairing troubled credit and how to improve credit post Bankruptcy.