An article in the Wall Street Journal was bolder that I might have been about the realities of the best place to find cash in an emergency. When I read the article I broke out in a huge smile for ear to ear. Amen.
People make the same chronic mistakes when they get into a financial bind if they have a home equity loan or a 401(k), they borrow from them to stay current. While that seems entirely logical to do, if your financial life does not improve, then all you are left with is either more debt secured by your house that you can’t pay or the loss of your retirement account.
So the downside if you borrow from the home is the risk of losing it in foreclosure now that you have a higher monthly payments from the home equity loan. If you were struggling to begin with you are going to been struggling more with that additional debt.
And the downside if you borrow from your retirement plan or 401(k) is that you may be faced with a tax penalty and income tax due for an early withdrawal. But if your employer lays you off, you may have to pay back the loan immediately. The biggest risk is that your cash in your retirement account is protected from bankruptcy. If you go bankrupt and leave the money in your 401(k) it will still be yours after bankruptcy.
You know, now that I think about it, your retirement account isn’t your money at all. It’s for someone else, yourself, but an older you. Huh? Keep reading.
Think about it like this, your retirement account is under your care to manage and protect, not for use now, but for an older you to use. You are the protecter of that account, the younger you. Forty years from now the older you will be eternally grateful that you cared enough to not leave dog food as the meal of the day. I would argue that you have a fiduciary duty, an implied contractual responsibility, to the older you to not waste, borrow or squander that money now.
I’ve talked about all that stuff before. But here is where the Wall Street Journal article really got bold.
Thinking about tapping your credit cards for extra funds?
This may not be as crazy as it sounds.
Sure, cards are an expensive source of cash. You’ll pay hefty interest. But hey, cash is cash.
Card debt is unsecured. So even if you end up in bankruptcy, lenders may not be able to touch your home, retirement accounts, and some other assets, depending on your state.
Consider two people with $100,000 in their retirement plans. One borrows $50,000 from his plan. The other borrows $50,000 on credit cards. Both end up out of work for years and eventually file for bankruptcy.
The first person gets the shaft. He’s left with just $50,000 in his retirement account, as he spent the rest. And he probably owes Uncle Sam about $12,000 in taxes and penalties too.
The second person? His credit’s a mess, but his debts are wiped clear in court and he walks away completely free – and with $100,000 still sitting in his retirement account.
Fair? Who said anything about fair?
There are risks, however. Richard Nemeth, a bankruptcy attorney in Cleveland, Ohio, says a bankruptcy judge may refuse to discharge your debts if they decide you borrowed the money with no intention of ever paying it back. But this doesn’t happen often, because intent is hard to prove. Especially if someone borrowed the money while they were still in work, and kept up payments for months before defaulting.
I agree completely. If you are down for the count and just need one more Hail Mary attempt to try and get through the mess you are in right now, the credit card idea isn’t so crazy. Just don’t raid the cards with the idea of going bankrupt after a fun vacation or after purchasing a large screen LCD television.
Sure it can be problematic but it’s not like losing your home to foreclosure or depleting your retirement account isn’t.