When Using Your 401 (k) to pay Credit Card Debt is a Bad Idea
While we should not get into the habit of purchasing items beyond the limits our cash flow can handle, and certainly not do so on credit, many people still find themselves with more bills to pay than income to pay them. In the midst of our credit crunch many are being faced with the tough decision of using their savings to pay off outstanding debt. Although quickly reducing your principal is key to reducing your debt, there are times when dipping into your retirement accounts is the wrong course of action.
In recent weeks, I have met with several clients who have depleted their savings and retirement accounts in hopes of paying off their credit card debts before coming to see me. They now have to file for bankruptcy anyway AND no longer have the savings and retirement accounts that they could have kept despite bankruptcy filing.
Using retirement money to pay down debt is often a bad idea because money in 401(k), IRA and other retirement accounts is typically protected from creditors, so you would be using cash that could have been preserved to pay debts that can be discharged from bankruptcy. Money in savings account up to a certain amount is also protected depending on the exemption limits of the state where you currently reside.
For example, in California or San Diego more specifically, you can preserve up to $21,850 in any asset including equity in real estate and personal property such as automobiles, checking and savings account, etc. Avoid the mistake of throwing good money after bad.
While financial consequences of filing for bankruptcy can be harsh and many still see filing for bankruptcy as a public declaration of failure or irresponsibility, it’s important to remember that the Bankruptcy Court was created to help those overwhelmed by debt to get out from under it and start over. Many people who have filed for bankruptcy, survived the process and emerged to create wealth and success again. To name a few, our founding father Abraham Lincoln and Donald Trump have both filed for bankruptcy, went on to become the President of United States and a billionaire, respectively.
