Individuals in South Carolina and throughout the country may use their 401(k) balance to pay down debt instead of filing for bankruptcy. However, that may be a mistake as funds in a 401(k) are protected in a bankruptcy filing. The same is generally true of any money kept in an IRA. Furthermore, a person could run the risk of accumulating new debt and eventually having to seek protection from creditors anyway.
Ultimately, a person is not able to avoid the harm that bankruptcy can cause to a credit score and history. Additionally, that person typically has no savings to fall back on, and this can be especially problematic for older Americans. The number of Americans over the age of 65 who have filed for bankruptcy has tripled since 1991. The cost of medical care combined with a lack of wage growth have made them financially vulnerable.
It is important to know that early withdrawal penalties may also apply when money is taken out of a 401(k). Those who are under the age of 59 1/2 could be hit with a 10% penalty, and that person would also likely be required to pay income taxes on the amount taken out. Many debts can be discharged in bankruptcy such as credit card or medical debt without the need to liquidate a retirement account.
Those who are looking for a way to get out of debt may want to consider filing for bankruptcy. Many different types of debt can be eliminated through this process, and it may enable a person to avoid creditor phone calls or letters. An attorney may be able to explain the process of filing for a liquidation or reorganization bankruptcy as well as the potential benefits of doing so.