When individuals are in financial crisis, bombarded by collection calls and creditor notices, their anxiety and stress levels often cause them to make desperate decisions such as cashing in 401k accounts to pay off credit card or other unsecured debt. Such actions can push an unpleasant but manageable situation into a dire scenario with no options. It is vital that individuals have a comprehensive understanding of the risks associated with withdrawing 401k funds. Financial crisis is a complicated and convoluted process; the most productive action an individual can take is to consult a NC Bar Licensed Attorney for legal, detailed guidance.
The following list consists of some of the overarching dangers of early 401k redemption in an attempt to resolve high levels of unsecured debt.
Risk #1: Eliminating the Safety Net of 401k. In the State of North Carolina, generally speaking, 401k and cash life insurance plans are protected and exempt from the claims of creditors and levies in a bankruptcy proceeding. Withdrawal of 401k funds removes the safety net of protection legally granted to the 401k funds and exposes the money to the risk of levies and creditor claims.
Risk #2: False belief that partial payment of debt utilizing 401k funds will prevent bankruptcy and satisfy your creditors. Creditors may still attach fees, penalties and interest to the remaining balance.
Risk #3: Unnecessary forfeiture of up to 50% or more of your 401k balance. Most retirement plans charge an upfront penalty and automatically withhold 20% for taxes. In addition, market fluctuations can devalue the balance even more. In an attempt to improve their financial security, individuals can ultimately cause more damage and place themselves in greater danger.
Risk #4: Jeopardizing your retirement instead of exploring your current options. Early withdrawal of 401k funds can drastically impact your ability to retire at a reasonable age.
* Remember that only a North Carolina Bar Licensed Attorney can provide legitimate, legal debt settlement counseling. Attorney credentials can be verified by going to www.ncbar.org. *