I’m Considering Cashing Out My 401K or Bankruptcy? – Gary

“Dear Lewis,

Married with 4 kids. My annual salary-$75,000. My wife makes $16,000 a year. Owe $175,000 on house – worth $200,000 and payment is $1380 a month. Have one car loan @$294 a month & balance is $8500. We have $29,000 in credit card debt costing $800 a month. Also have $21,000 in 401k loans costing $593 a month. I have $29,000 left in 401k. I can’t seem to make all these payments. I’m 30 days late on credit cards and about to be 60 days due to lack of funds. Should I file bankruptcy or cash 401k? The stress is causing me sleep loss and ulcers. Can’t seem to get ahead.

Was wondering if I should cash out 401k to free up funds or file bankruptcy? My daughter is a senior this year, so got college plans to deal with soon. I just seem so upside down. I get paid every Friday but the checks are long gone so fast. My debt to income ratio is about 48% based on my calculations. I know that’s not good. HELP!!!

Gary”

Dear Gary,

STOP! Do NOT cash out your 401k until you talk to a bankruptcy attorney first. 401k’s are fully protected in bankruptcy, no one can touch them.

So why cash it out to pay credit cards? Especially if you have a child going into college soon.

But you also need to talk to a bankruptcy attorney about any possible asset issue. Each state has different exemptions to protect property. In Florida, where I practice, there is an unlimited homestead exemption. But I don’t know where you live to make sure your equity is protected – but I presume that it will be protected.

About $30,000 in credit cards is a large amount to dig out of, especially when you are already late paying the cards. The late payments will do as much damage to your credit report as much as the bankruptcy filing. That is why bankruptcy now, before more late payments drop your score even more, might be your best option.

Good luck!

My name is Lewis Roberts and I’m an attorney licensed in Florida and Georgia. My practice focus is consumer bankruptcy, real estate issues/closings, and mortgages. I also have Florida real estate broker and mortgage broker licenses. I am a proud member of the National Association of Consumer Bankruptcy Attorneys (NACBA), National Association of Consumer Attorneys (NACA), and a graduate of Max Gardner’s Bankruptcy Boot Camp. I enjoy helping people with decisions that impact their financial well-being.

Legal Disclaimer: This is for educational purposes only. It is not to be relied upon as legal advice. It also does not create an attorney-client relationship. No such relationship is formed with attorney without a written agreement.

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