How to File Bankruptcy or Cash in a 401k
For many debtors, filing bankruptcy is the least attractive option for digging out of a financial hole. If you have a 401k account, you may consider cashing it in to pay down your debt, rather than file for bankruptcy. However, in certain situations, that may be an even worse option. If you liquidate your 401k plan, you may be able to pay off your debt, but you will have no retirement savings. If you file bankruptcy, your state may exempt your retirement plan from liquidation. In this case, the bankruptcy discharge takes care of your debt, and you still have your 401k account.
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Instructions
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Contact your 401k administrator. Generally, you cannot liquidate your 401k unless you separate from service or have a qualifying financial hardship. Verify that the plan will allow a liquidation of your account in your situation. Your administrator may also suggest a loan, which is tax-free and which you pay back to your own account.
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Visit a bankruptcy attorney. Filing bankruptcy is a difficult process. If you file yourself and miss any of the numerous legal provisions applying to your case, the court may dismiss your case. Bankruptcy attorneys will often offer free consultations.
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File your 401k liquidation paperwork with your administrator. If you choose the 401k route, provide your administrator with details on how to send you the money, such as a bank account number or a mailing address.
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Investigate bankruptcy chapters. A Chapter 13 bankruptcy can protect your assets, but you have to pay back your creditors over time. A Chapter 7 bankruptcy allows you to discharge your debts in as little as three months, and requires no such payments. However, the trustee may take possession of your assets that do not qualify for protection under state bankruptcy laws.
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File appropriate bankruptcy forms with your local bankruptcy court. You must list everything about your finances on your bankruptcy petition, such as the amount and type of property you own and the people to whom you owe money. Your local bankruptcy court can provide you with all the necessary forms, including local forms that apply only to the specific court district in which you file.
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Pay the filing fee or your taxes. If you file bankruptcy, you will have to submit a filing fee to the court. If you cash out your 401k, the money you take out is typically taxable. You must include the amount you withdraw on your state and federal tax returns.
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Attend your court hearing. When you file bankruptcy, the court will notify you about a hearing you must attend with your bankruptcy trustee. If you miss this meeting the court can dismiss your petition.
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Tips & Warnings
Assess your present and future financial situation. If you are young enough to rebuild your retirement savings, you may prefer to cash in your 401k rather than risk long-term damage to your credit report. If you need to preserve your retirement savings and don't intend on using credit for the near future, you might explore bankruptcy as an option.
