Overcoming Personal and Legal Challenges

Overcoming Personal and Legal Challenges

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Three reasons not to raid your 401(k) to pay debt

When creditor calls seem never to stop, you probably feel that you will do anything to stop the harassment, perhaps even go to your retirement funds such as your 401(k) to pay your outstanding debt. However, cashing out part of your 401(k) is an unwise and even unnecessary move to solve your debt problems.

Understanding why your 401(k) should remain intact can help you feel confident that another solution such as bankruptcy may be a better option to alleviate your debt issues.

You terminate compound interest

The great benefit of putting money in your 401(k) and other retirement investments is that it can earn compound interest. The longer you keep your funds in your 401(k), the longer it acquires compound growth. So if you withdraw money early to cover a debt, you will miss out on possibly years of compounding interest that could have grown your investment by thousands of dollars.

Bankruptcy protects your 401(k)

The idea behind bankruptcy is to restore you to financial health, which would be difficult if creditors took all your retirement money. The good news is that your 401(k), your IRA and other accounts all receive protection in bankruptcy. Even if you end up liquidating other assets to pay off debts, your retirement accounts remain shielded from creditor claims.

You might file bankruptcy anyway

Cashing out part of your 401(k) early might seem to work as a short-term fix to pay off some debt, but if your finances are in serious trouble, raiding your retirement funds may only be delaying the inevitable. If you end up filing for bankruptcy in spite of your efforts, you will have lost some of your 401(k) unnecessarily.

It is true that going through bankruptcy may negatively impact your credit score, but you can still pursue efforts to raise your credit. This is preferable to having to rebuild your retirement funds in your older years.