401(k) 403(b) Retirement Money Ask The Get Out of Debt Experts

I’m Looking to Cash in My 401(k) to Settle My Credit Card Debt. – Jackie

“Dear Steve,

I am currently unemployed and have 50,000 in debt.

I am looking to cash in my 401K to settle my debt with the credit card companies. I even called to see if they would take less than I own, by doing this I was told that the amount I don’t pay has to be claimed as income on my taxes. I will have no money left to pay income tax on 20 some thousand dollars. Do you have to take that unpaid amount as income? What do you suggest?

Jackie”

Dear Jackie,

I suggest not doing that. If you pursue bankruptcy instead you will probably qualify for a Chapter 7 bankruptcy, be out of debt in months, have no tax liability and the money in your 401(k) will be protected from creditors.

Before you touch that money slated for retirement that would be hard to replace, click here to find a local bankruptcy attorney or get a second opinion from Damon Day.

My vote, it’s a bad move.

Please update me on your progress by posting updates here in the comments section of your question. I’m very interested in how this works out for you.

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Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

6 Comments

  • These things never end well without honesty. Imagine the explosion that will occur when it comes out later you threw away 30% of your retirement money to early withdrawal taxes and penalties simply because you wanted to maintain a deception.

    In all my years the same pattern occurs in these situations. One spouse comes clean, there is a chill in the air for a couple of weeks or so and then the other spouse comes back around. Remember, the relationship is for better or worse.

    The tax consequences of the withdrawal will appear on your tax return, settling the debt will involve some intense collection activity, will hurt your credit for seven years, possible law suits, potential wage garnishments, additional potential tax due from the forgiven debt, etc.

    And the only reason you want to throw away 30% of your retirement money to early withdrawal penalties and face all that other stuff is because you don’t want to be honest with your husband? Don’t compound the mistake, please.

    Go talk to the bankruptcy attorney. Come up with a solution to the problem. Then talk to your husband about the situation, tell him you have a solution, and move forward together.

    I want to give you a big hug but I need to clearly tell you this first because I care. It’s the same thing I would tell any of the people I love that come to me with the same situation and position. You are making a huge mistake by not coming clean, dealing with the consequences of your hidden debt, and protecting your 401(k). It’s not the smart move.

    Big hug.

    Steve

  • Jackie,

    There is likely no way that you can get through the collection cycle to settlement then to the tax reporting and solvency test to see if you owe the tax – without your husband finding out.

    That being the case, it would likely be best to come clean with your husband and discuss the next best step for your household finances together.

  • I can’t file bankrupcy because my husband doesn’t know about the debt. I have the money to pay the credits off with the negotiations, but do I have to take that amount as income on my taxes? What other risk do I have by doing this?

  • I can’t file bankrupcy because my husband doesn’t know about the debt. I have the money to pay the credits off with the negotiations, but do I have to take that amount as income on my taxes? What other risk do I have by doing this?

    • Jackie,

      There is likely no way that you can get through the collection cycle to settlement then to the tax reporting and solvency test to see if you owe the tax – without your husband finding out.

      That being the case, it would likely be best to come clean with your husband and discuss the next best step for your household finances together.

    • These things never end well without honesty. Imagine the explosion that will occur when it comes out later you threw away 30% of your retirement money to early withdrawal taxes and penalties simply because you wanted to maintain a deception.

      In all my years the same pattern occurs in these situations. One spouse comes clean, there is a chill in the air for a couple of weeks or so and then the other spouse comes back around. Remember, the relationship is for better or worse.

      The tax consequences of the withdrawal will appear on your tax return, settling the debt will involve some intense collection activity, will hurt your credit for seven years, possible law suits, potential wage garnishments, additional potential tax due from the forgiven debt, etc.

      And the only reason you want to throw away 30% of your retirement money to early withdrawal penalties and face all that other stuff is because you don’t want to be honest with your husband? Don’t compound the mistake, please.

      Go talk to the bankruptcy attorney. Come up with a solution to the problem. Then talk to your husband about the situation, tell him you have a solution, and move forward together.

      I want to give you a big hug but I need to clearly tell you this first because I care. It’s the same thing I would tell any of the people I love that come to me with the same situation and position. You are making a huge mistake by not coming clean, dealing with the consequences of your hidden debt, and protecting your 401(k). It’s not the smart move.

      Big hug.

      Steve

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