Nobody wants to file bankruptcy unless it is their last option. In my office, I have every client sign a paper indicating that they believe that bankruptcy is their last option.
Whenever you look at your options, be sure you look at all of your options, including ones you don’t think you’d like, then pick the one that’s best for you. Be sure to “rise above the treeline” to see where each road goes. If can’t see yourself going all the way down a certain road, then should you even take one step in that direction?
Below is a common alternative to filing bankruptcy.
Borrow Money From You 401(k), or Take A Distribution From Your IRA.
If you use retirement funds to pay debts, then you may be left with little or no retirement funds left for retirement. Relying on Social Security is risky because it may not be there when you need it, and Social Security probably will not provide you the level of income you want. Right now, the average monthly Social Security Check is about $1,100.
If you borrow money from your 401(k), you will be required to pay it back. If you fail to pay it back, then you will be assessed a 10% penalty and have to pay income taxes to the IRS, all of which may total 40% of the amount taken from the 401(k).
If you take a distribution from you IRA, then the IRS requires payment of a 10% penalty (If you are younger than 59 1/2) any income taxes on the money taken as a distribution. Like the 401(k) the penalty and taxes could amount to 40% of the money taken from the IRA.
Many people have come to me to file bankruptcy after they have already taken retirement funds to pay debts that could have been discharged in bankruptcy. After they learn about their alternatives, they regret ever having reaching into their retirement funds. I recommend that you take a realistic look at your financial situation before you look to your retirement funds as a solution to your debt problems. Here’s a gut-check: If you can’t see yourself going all the way down a certain road, then why take even one step in that direction?
Remember, the only thing worse than filing bankruptcy is using your retirement money to pay some of your bills, then having to file bankruptcy to handle the rest of your bills.
