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Borrowing from a 401(k)

On Behalf of | Jan 30, 2018 | Chapter 13 Bankruptcy

Many Houston residents are struggling with high debt levels. In many cases, these folks may want to do the right thing and meet their obligations to creditors. For those who are employed and have retirement accounts, borrowing from a 401(k) may be a tempting debt management strategy.

Financial experts tend to be wary of this option, however. For one thing, saving for retirement is an important aspect of personal financial management. Borrowing from a retirement plan to pay down current debts can compromise an individual’s long-term financial health. For example, some plan rules may prevent additional contributions until loans are repaid. This can further delay meeting retirement goals.

There are also significant tax repercussions for taking out 401(k) loans. These additional obligations can, in some cases, actually increase an individual’s overall debt.

In many cases, it will make more sense to investigate other ways of paying off debt. For example, those who have good credit might be able to transfer credit card balances to a new card with a very low introductory interest rate. Other options include reviewing a household budget to trim unnecessary expenses and prioritizing the repayment of high-interest balances.

When other repayment options do not appear to be realistic, chapter 13 bankruptcy may be an option. In this form of bankruptcy, debtors can keep their retirement accounts, homes and other assets while paying off their debts in a three- to five-year repayment plan. This allows the debtor to move forward with retirement savings while also reducing their current debt load.

Individuals who are considering bankruptcy might benefit from consulting with an attorney. A lawyer could review the client’s case and make recommendations regarding the type of bankruptcy they qualify for.