Almost everyone I meet with in my Asheville office would like to find a strategy to avoid bankruptcy. I examine their non-bankruptcy options before ever considering a filing. One option is to borrow money against a retirement account in order to pay back debts.
The good news for 401k loans is that they are easy to qualify for and provide immediate, necessary cash. However, it is important to understand that these loans will not be discharged if a bankruptcy becomes necessary down the road. More importantly, retirement accounts are protected in bankruptcy with an unlimited exemption. You get to keep everything. The theory, which I agree with, is your retirement is not optional. Barring accidental death, it would be almost impossible for you to work up until the day you die.
As a rule of thumb, a 401k loan should not be taken out to pay off debts which would be discharged in bankruptcy (credit cards, personal loans, medical debts, etc). This money is unavailable to unsecured creditors when it is in your retirement account, but creditors’ lawyers try to collect the money loaned against the 401k.
If you have already taken out a 401k loan, there are still options in bankruptcy for you. Sometimes, borrowing against the 401k is the best option. One example is when a client is behind on mortgage payments and wants to catch up before filing a bankruptcy case.
The bottom line is that before you borrow against your 401k, you should seek the advice of an experienced bankruptcy attorney. If you live in Western North Carolina, I would be happy to speak with you.
