I Borrowed From My 401K to Pay Debt and It Made Things Worse. – Anita


“Dear Steve,

My husband is self employed and has been so for 23 years. A year and a half ago, he was doing a large commercial job, and the people went bankrupt and basically screwed us out of $75,000.

At the same time, another client took us for $10,000. Obviously, this was a whole year’s salary for us and we had a kid in college.

We own 8 rental properties which several did not pay the rent at the same time. Thinking we could slowly work our way out of debt, we used our credit cards to live on (plus the $75,000 was also on the credit cards. I borrowed $50,000 from my 401K to try and pay some off, but the interest rates went up to 29.9% and we obviously were in over our heads.

We are in debt in unsecured loans in the amount of $160,000. Due to the economy, my husband has not had work for 3 months. We tried to work with the credit card companies but we could not even pay a small amount that they wanted on all of the cards. My paycheck was cut in half because $1,500 a month goes to pay back the 401K loan I took out.

My question is this . . . what can we do to start getting out of debt and not totally lose everything we have worked for all our lives. We had decent credit until 6 months ago. What steps should we take to try and get out of debt?


Dear Anita,

I certainly can feel your pain and I will never forget what that frustration of debt felt like.

But here is a fact to consider, holding on tighter to a sinking ship does not make it stop sinking, it just drags you down with it.

The cards have all been dealt here and you are going to have to play the hand that you’ve got. With obligations, liabilities, and less income, wishing is not going to change the situation.

What you really need to do now is be honest and realize that between the lack of income, the slashing of your check, and the escalating interest rates, the chances of you pulling out are nil.

See also  How Can I Convince Creditors to Work With Us Rather Than Force Us Into Bankruptcy? - Penny

Sure, anything is possible. Business could boom right again, the people that owe you could present a check tomorrow, and the credit card companies could all drop your rates to 0% and send a note apologizing for the rate increase. That’s not going to happen.

I never like to see anyone borrow from their 401K for debt. And whatever money you have left in your 401K now, you need to leave that alone.

Here is what I think you need to start coming to grips with, right now.

  1. Your husband needs to go out and get any sort of job he can find. I don’t care how crappy it might be, right now, income is income. When I went bankrupt I had to do that and trust me, going from running a large medical practice with 45 employees to getting people coffee, is not fun. I hated it, I did it. I had to do it.
  2. You need to understand that this situation is not going to get better without some sort of intervention. That intervention is going to be bankruptcy. It sucks but it is what it is.
  3. You need to go and meet with a local bankruptcy attorney and discuss your situation. You don’t need to go with the intention of filing bankruptcy, but to educate yourself about what bankruptcy means to you and your situation.
  4. You got crapped on by your customers and now you are the conduit that it going to pass that crap onto your tenants. Unless you can sell your rental properties and the buyer will let your tenants stay in them, they will be left out on the street. If bankruptcy is in your future, you owe it to them to give them as much notice as possible that they may have to move.

While this all looks absolutely horrible right now, it can be what you can make out of it. This is your opportunity to start over, to shed all the things that are dragging you down, and to give you a shot of a new future instead of decades of trying to repair the past.

See also  Should I Cash Out My 403(b) Retirement Account to Pay Off Credit Cards

Your future will be different, but different does not mean worse. Change hurts but good things do come from change. You don’t have to be excited about this change in your life but you will have an opportunity to build a new life and ask yourself, what do I want my new life to be?

I’d suggest that instead of focusing on what you might be losing, you instead turn to focus on what you have to be grateful for. Maybe that is the love of your husband and your family. It could be friends that care about you. Maybe it is a hobby that brings you peace and joy. Maybe a fresh return to a religious congregation will bring you some comfort. But no matter what, even in the darkest days, and as long as you have a breath left in you, you can either look back with anger and loss or you can look forward with hope and enthusiasm for a new day.


You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.

Leave a Comment