Is It Better to Go Bankrupt or Settle My Debt With 401(k) Money? – Lynn

“Dear Steve,

Hi Steve, first let me tell you what agreat comfort you are to many people. Honest advice is hard to find. I have written you before and value your opinion.

If there is a way to settle debt with the creditor for a decent amount, is it not better to do that than go bankrubt? I will have to take a loan from my 401k but all the debts will be settled. However, I understand tht the IRS will come knocking from the 1099’s.Is this always the case? If this is true I will be back in debt again. Is there a way around this,Is it the best route to take? 65,000 in debt with offers to settle for half


Dear Lynn,

Thank you very much for the compliment. I do try very hard to give impartial and honest advice.

Your scenario is one of the prime examples of debt repayment that I’d hate to see happen. Your 401(k) might feel like a savings account you can rob, but it’s not. In fact the 401(k) is protected from your creditors in case you did go bankrupt. Why? Because that’s the money you are saving to retire on. If you drain that account then it will be impossible to get back into the same position again to have as much money to grow and compound. Taping that account will cost you dearly.

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Which would you rather be, someone that had once gone bankrupt or someone that is now 70 years old, ill, and does not have enough money to retire on after social security went broke.

Not to be too extreme but the bet comes down to which you’d rather deal with, some intermediate pain from bankruptcy or living in a crappy place and eating dog food when you are elderly. Ultimately the choice is yours but you can see why I always look at the 401(k) as being untouchable.

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The thing that makes bankruptcy the most unpalatable to you is not the reality of it, but your fear and assumptions about it. If you settle the debt you’ll have bad credit reported about you for seven years. If you go bankrupt you’ll have the bankruptcy reported about you for seven to ten years.

So Lynn, just based on those cold hard facts, which option looks better for your future safety and protection?

Please update me on your progress by

P.S. Be sure to read ‘The Secret of Surviving Through Difficult Economic Times. What I Learned On My Journey‘.

Damon Day - Pro Debt Coach

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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.
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