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.