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Never use your 401(k) account to pay off debt

Many older people, many of them retirees, try to make a point of staying on top of their financial responsibilities. When they experience financial difficulties, they might turn to their 401(k) plans to pay off their debts. However, this can end up being a huge financial mistake that they never recover from.

What is the problem with using retirement plans to pay off debt?

One reason that older people sometimes turn to their retirement plans to pay off debt is because they want to avoid bankruptcy. They’re afraid that bankruptcy will ruin their credit and make it difficult for them to obtain loans in the future. The main reason that they should never touch their 401(k) accounts is because that money is actually protected by federal law. If someone were to go through bankruptcy, the money in their 401(k) is exempt from seizure. If that person ends up moving money out of their 401(k) into their savings or checking account in order to pay off debt, that money is no longer protected by federal law and can be seized.

The other downside is that when people take money from their 401(k) to pay down the debt, they may end up having to file for bankruptcy anyway. This is usually because they no longer have a financial cushion or savings.

What should someone do if they need help with filing for bankruptcy?

People who are filing for bankruptcy may benefit by working with attorneys who have experience with this type of law. Legal professionals may help clients determine what they need in order to file for bankruptcy so that they retain as much of their property and assets as is allowed.

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