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?
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.
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.