Can I use money from my 401K to pay off debts so that I don’t have to file bankruptcy?

Is this possible? Is it advisable? Or should I threaten to do so? Would there be any adverse income tax consequences? If I go bankrupt would my 401K money be protected? 

Asked on July 16, 2010 under Bankruptcy Law, Alabama

Answers:

M.T.G., Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

In Bankruptcy you have to choose between taking the exemptions permitted under your state law or the exemptions permitted under federal law.  Sometimes one may be more advantageous that the other depending on your personal circumstances.  Generally, 401 K plans have what is known as an "anti alienation" clause that precludes them from the bankruptcy estate.  In other words, they can not be touched by creditors.  Pulling out money early from a 401K can have serious tax consequences.  I would strongly suggest that you seek help from a debt counseling service in your area or a bankruptcy attorney before you make any decisions on how you are going to manage the debt.  Take a deep breath.  It is always darkest before dawn.  Good luck.


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