Borrow Against My 401K To Pay Off My Credit Card Debt or Medical Debt?

Middle Aged Couple Relaxing In CountrysideBorrowing against your 401k is a terrible idea.  With Georgia Bankruptcy Exemptions, your 401k most likely will be 100 percent protected from your creditors.

One of the most common mistakes I see people make is that they will borrow against their 401K to pay off credit card debt or medical debt.  Within a short period of time, they realize that they are not going to be able to make the 401k loan payment.   Trying to get by, they skip other important bills like car payments and house payments.  Then, they come to my office to file Chapter 13 to save the house and car.  The reason I feel so bad for these people is because we could have wiped out the credit card debt and the medical debt in a Chapter 13 or a Chapter 7 but now we are stuck with this 401k payment that they cannot afford.

Defaulting on the 401k loan is a bad idea because of the tax penalties. When a person defaults on a 401k loan, they will have to pay the government taxes that they otherwise could have completely avoided if they had never taken out the 401k loan to begin with.

I recently met with a couple from Dallas GA who had about $50,000.00 save up in their 401k. After the husband lost his job, they slowly borrowed against the 401k to make payments toward their credit cards and other living expenses. Unfortunately, they did not come to see me until they had exhausted all of their 401k. Not only did they no longer have any money in their 401k but they also now had over $20,000.00 in tax penalties for the withdrawal. If they had been in a position to pay back the 401k loans, there would have been no penalties. Unfortunately, the husband was not able to find another job.

Your 401k is meant for your retirement.  Don’t ever treat it like an emergency fund.

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Other Posts:

1. What is Chapter 13?

2. What is Chapter 7?

3. How much does it cost to file?

4.  Stop Garnishment

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