Legal Question in Credit and Debt Law in Virginia

Re: early withdrawel from 401(k)

Very thoughtful responses from my colleagues. I would add (or emphasize) that it is a mistake to look for a "generic" answer to your situation. You really should consult an attorney. For example, an attorney might suggest an alternative you had not thought of, like bankruptcy as here. Also, an attorney would want to take a look at the exact wording of the 401(k) that you are referring to. You should also get a copy of your credit report, to see if this is already being reported as bad credit, as my collegues suggest. In that case, letting the creditors go ahead and sue you might not make much difference (although they can garnish your wages and bank account, so one must consider what your salary is and whether or not a creditor could take action to seize any cash or property from you.

Re: early withdrawel from 401(k)

Your decision depends on several factors. Are the creditors suing you? What is your credit like now? Do you want to rebuild your credit if it is bad? If you withdraw money early from the 401(k), it will either be a loan with the obligation to repay it or a taxable early withdrawal. If you fail to repay the loan, you will have taxable income plus penalties.

If you now have bad credit, simply repaying the creditors will not repair your credit. I urge you to consult with an attorney before you borrow from your 401(k). Virtually all of my clients who do so regret it.

Re: early withdrawel from 401(k)

Mr. Sawyer's response is right, but let me explain a bit more. If you file bankruptcy, your 401(k) money will be exempt, i.e., the trustee will not be able to take it to pay your debts. You will be debt-free (assuming no non-dischargeable debts), and you will still have $170K in your 401(k). To pay $55K in debts, you will have to withdraw nearly $100K from your 401(k), whether by loan or early withdrawal, leaving you with only $70K. If you still have good credit, maybe that (and your personal ethical/moral issues about paying your debt), are worth $100K, but maybe not. If your credit is already bad, as Mr. Sawyer said, paying the debt now will not fix it. You need to weigh these issues (with the advice of a lawyer versed in bankruptcy law) and decide.