Should I take a loan from my retirement plan to repay my debt?

February 22, 2012

This is a question that I am often asked by people with a lot of debt.  There are two very important reasons why borrowing money from your retirement plan is a bad idea.

1)  The money in a 401k or similar retirement plan is completely safe from all your creditors.  No court can force you to repay debts from a retirement plan.  For most of my clients, their retirement may be their only real asset.  Taking your only asset, which could not be touched by creditors, and using that money to pay creditors is generally not a good financial move.

2)  The money that you put into your retirement plan was probably contributed pre-tax (meaning that you didn’t pay tax on that money).  If you borrow money from the plan, the money used to repay that loan is taken after taxes.  Which means that you pay income tax on the money used to repay the loan.  That might seem okay.  Just think though, when you are in your golden years and you draw that money from the retirement account, you will be taxed AGAIN!!!!  In other words, the money used to repay a loan will be taxed twice.  That is a bad deal!

Before you consider touching your retirement account to repay debt, talk to a good bankruptcy lawyer.  Some of the saddest stories I hear are from folks who completely drained their retirement accounts and still needed to file bankruptcy.  Had they met with me first, at least they would still have their retirement money.

If I file for bankruptcy will anyone ever give me credit again?

February 2, 2012

First of all, the answer is “Yes”!  Many of my clients are eligible to receive credit cards immediately upon the conclusion of their bankruptcy case.  The interest rates on these credit card offers are very high and they often come with high fees.  The reason the credit card companies are so willing to give credit cards to people fresh out of bankruptcy is because they know these people cannot file another bankruptcy for many more years.

I recommend that my clients establish a regular plan of savings before ever considering another credit card.  Be honest with yourself.  If you don’t have the discipline to pay the credit card balance in full each month, do not get a credit card!

Can I repay my relatives before I file for bankruptcy?

February 1, 2012

You could do that, but it would be a VERY bad idea.  You see, there are special rules that apply to loans repaid to relatives.  You cannot treat Mom better than Visa or Mastercard.  Any money repaid to a relative in the 12 months prior to the filing of the bankruptcy can be taken back by the bankruptcy trustee. That money will then be used to repay some of your other debt.

There is nothing which prevents you from voluntarily repaying any creditor once your bankruptcy case is over.