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Increase in Hardship Withdrawals from Pensions Points to a Major Problem

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As people in financial distress get more and more desperate for money to pay for necessary expenses, they start looking in the wrong places. Unfortunately, according to this article on the Huffington Post, this includes getting hardship withdrawals from their 401(k) pensions, and the trend is on the rise in a big way!

People need money for medical expenses, payments to prevent eviction or foreclosure on a primary home, or for the repair of damage to a primary home. The problem is that this is not a loan.

If the person is younger than 59 1/2, the or she will end up paying a 10% penalty for early withdrawal in addition to taxes! On top of all that, the average age of the people taking these withdrawals is between 35 and 55, their peak earning years.

Why These Withdrawals Are a Bad Idea

This makes these withdrawals a bad idea for three reasons:

  1. They result in a tax liability;
  2. They can have a devastating effect on the person's retirement future due to the lost growth potential on that money; and
  3. In many cases, there is a better way.

What Is a Better Way

What do I mean by a better way? Bankruptcy. These withdrawals are often used as a way to avoid filing, but only end up making things worse. They take an asset (401k money) that would never be part of an asset estate (i.e reachable by creditors) and use it to pay debts that could either be discharged (wiped out) in a chapter 7 or paid over time in a chapter 13.

Just look at the uses for the money approved by the IRS for hardship withdrawal: medical expenses can be discharged if already incurred, or future treatment might be affordable if other prior debts (such as credit cards) are wiped out; the same is true of expenses for home repair; and payments to prevent foreclosure or eviction can be done through a chapter 13 plan.

So What Do I Do?

If this sounds like you, you live in southern New Jersey and you are considering filing bankruptcy, please feel free to call me at 856-432-4113 or contact me through this site for a free consultation in my Woodbury office to discuss your case.

If you have more questions about bankruptcy, then download my free book,Top Questions People Ask About Filing Bankruptcy in New Jersey.

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