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Dear Liz: In your column in our Sunday paper, you gave advice with which I strongly disagree. The question to you was whether to pay off a $50,000 credit card debt from retirement funds of $250,000. I found your advice not to use this money, citing tax penalties, loss of retirement income, etc., to be irresponsible. Do you consider encouraging bankruptcy to be ethical financial advice? Once again, another unwise borrower does not have to be accountable and is shown the easy way out. Many people have had to tap their 401(k)s before retirement for various reasons. The money is owed, the borrower has the means to pay it, so he should pay it.

Answer: Why do you think premature withdrawals from retirement funds are so heavily penalized? And why do you suppose retirement funds are protected from creditors in Bankruptcy Court?

It’s because lawmakers have decided that there are some things worse than reneging on your debts, and one of them is an impoverished old age.

Yes, if you take on a debt, you should do your utmost to pay it back out of your current income. If you need to sell otherwise-unprotected assets to do so, then do so.

But tapping retirement funds prematurely is rarely smart, and it’s particularly unwise if there’s a possibility that you’ll wind up in Bankruptcy Court. Advising people of that fact is a long way from encouraging them to file for bankruptcy.

By the way, few people who have been through it would call bankruptcy an “easy way out.” Many people struggle with the decision, put off filing for too long and drain the very resources that could have been protected, only to end up having to throw in the towel anyway.

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Categories : Bankruptcy, Q&A, Retirement

6 Comments

1

Sound advise. I agree with Liz.

2

I see the point of protecting your future, and I agree. However, that 50k credit card probably has a 20% interest on it. I would tap into that 250k retirement account to pay off the 50k debt or at least a big portion of the 50k.

3

But the math doesn’t really work, Danny. The taxes and penalties will equal at least 25% of the withdrawal. Add in the lost future gains, and the current interest rate is dwarfed.

4

Thank you for your insight. I am mulling over the same decision right now. I recently lost my job and was thinking of paying off CC debt with a portion of my retirement plan. I am only 37 and think that being debt free(CC debt is the only debt I carry) with no steady income in my immediate future is worth the cons of losses incurred

5

Actually, Linda, the younger you are, the worse the move it is, because you have all those years of future compounding at stake. It’s so much better to pay credit card debt off with current income rather than to dip into your retirement.

6

I agree with Liz. I am a bankruptcy attorney and so many people come to me to file -after- the retirement and 401K’s have been drawn down to zero… not only do they still have debt to pay and now a diminished hope of a dignified retirement, but they often now have a tax bill to the IRS that I can’t help them with in a Chapter 7. It’s pretty sad when they find out they didn’t have to lose those accounts if they had only come seen me sooner.