California consumers who are struggling to obtain a loan may be tempted to borrow funds from their 401(k) retirement plan. While this may appear to be the perfect solution, it may need careful consideration as there are many disadvantages attached. The credit scores of consumers who consider digging into their retirement funds may be too low to allow them to qualify for a mortgage or loan. This may be an indication the they are already experiencing financial difficulty, and it may be wise to work on regaining financial stability. In some circumstances, filing for personal bankruptcy may be an appropriate solution.
Borrowing from a 401(k) retirement fund can have several consequences. If the consumer is not older than 59.5 years old, the loan has to be repaid within a specified time. Failure to do so will bring about early withdrawal penalties, along with state and federal taxes. There is always the potential danger of job loss, and if this happens, full repayment of the loan may be required within 60 days. Similarly, if it is not paid back in that time, there could well be severe tax consequences.
Proactive consumers often benefit from regular payments into emergency funds that may avoid the need for an early withdrawal of retirement funds. The amounts that can be borrowed on 401(k) are restricted. In addition, if they do utilize 401(k) funds, they will effectively have to repay the money to themselves -- with interest.
Before taking such a drastic step, California consumers may benefit by exploring the advantages of filing for personal bankruptcy. Upon filing for bankruptcy, an immediate stay will be activated that will forbid any creditors to contact or harass the consumer while proceedings are pending in Bankruptcy Court. An experienced bankruptcy attorney will explain the requirements and advantages of a Chapter 7 liquidation bankruptcy and a Chapter 13 debt reorganization plan. Understanding the details of personal bankruptcy options may enable a consumer to make informed choices related to his or her financial stability.
Source: CNBC, "Cash-strapped? The dos and (mostly) don'ts of 401(k) loans", Shelly Schwartz, Jan. 21, 2015