Why Should I File A Bankruptcy Instead Of Taking A 401k Loan?

Unfortunately, our educational system was fundamentally flawed when I was in school and probably still is but not in the way you might think.  Americans are not taught, at least on any consistent basis, the fundamentals of personal finances.   We are young and do not have to worry about tomorrow.  So when people are given the option to contribute to a 401k all too often they opt out because, after all, they need more money in their weekly paycheck just to make ends meet.  Then there is a segment of the working population that opt to contribute to their 401k (usually minimally).  Perhaps, they are single or living with their parents and they won’t really be impacted by receiving a few dollars less on a weekly basis.

Life continues and perhaps, the once single person contributing to an 401k is now married with a family.  They are still faithfully contributing to their 401k but they need a replacement vehicle as their vehicle just suddenly died or the escrow portion of their mortgage increased due to a tax increase and now their mortgage is $150.00 more than it was last month.  How does the Average Joe deal with the daily increase in living when their pay checks only consistently go down?

Please do yourself a favor and consider Bankruptcy before you take your next 401k loan.

Remember, “Life is 10% what happens to you and 90% how you react to it.” ***Charles R. Swindoll

The answer is far to often, they take a 401k loan just to make ends meet.  When you are living pay check to pay check sometimes it seems like it is the only answer.  There are several reasons you should not take a 401k loan.  The most important one is that the loan is just that, it is a loan.  You have to pay it back.  You may say to yourself I need the loan to fix the car now so I will just pay myself back out of my check.  You may say no problem we can cut back on a few things but then the hot water heater needs to be replaced and then what?  That is life, right?

The problem is that you did not have the money to fix the car and you were barely making ends meet.  Now after the 401k loan you have less money coming home every pay period.  Based on my experience, 401k loans repayments unusually average $150.00 to $300.00 or more per pay period.   The loan period can range from very short term to 5 or even 10 years!    I have even seen pay checks that have had as many as 4 loan repayments at one time which leaves very little to actually live.

Another think you must consider before taking a 401k loan is that if you are unfortunate enough to lose your job before the loan is paid back the loan has important and severe tax implications for that pending tax year.  If you are in this situation you should consult with a Certified Public Account who can advise you how to best handle your situation.  Filing a bankruptcy after taking a 401k will be helpful but bankruptcy does not eliminate the need for you to repay the 401k loan.

If you file a bankruptcy before taking a 401k loan it may free up money pretty quickly if you are spending hundreds if not thousands of dollars on credit card payments each month.  A 401k is a protected asset in a bankruptcy which means you get to keep it.  Congress deemed retirement accounts to be so important that it protected accounts from creditors.  The retirement account cannot be liquidated to pay your creditors. So there is no need to feel guilty or ashamed because protecting your 401k is the law.  Many people believe taking 401k loans is the right thing to do but you must consider your personal finances a small business, allowing you to do the right thing to keep your business a float.  Chapter 7 and Chapter 13 filings are personal restructuring.

Whether you choose to file bankruptcy or not, we all must do our best to save for retirement and in doing so must also be diligent for saving for the next emergency “because life happens.”  A good suggestion is to set-up a savings account and have a certain amount deducted automatically from your check (kind of like paying yourself for the future).  Open an account at a small out of the way bank.  Somewhere were you are less likely to go out of your way to dip into the funds in your savings account.  Although there are pros and cons consider not linking it to an ATM card to limit the likelihood of an impulse withdrawal.

Trust me I know it is very hard to save; however, we need to save and teach our children and grandchildren to do the same.

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