No one wants to file bankruptcy. It is certainly a last resort and should be treated as one. However, there are certain steps that people take to avoid bankruptcy that can be a mistake.
One of them is borrowing from a pension. This can be used as a quick debt consolidation, usually at a lower interest rate than the credit cards, but is not the best option in most cases.
This is because you are risking your future (your retirement) to resolve a short term debt problem, as well as using funds to pay debts that would ordinarily be beyond the reach of creditors.
When Is It a Good Idea?
The only circumstances in which borrowing against your pension to avoid bankruptcy would be acceptable would be where:
- The interest rate on the loan meets or exceeds the annual rate of return for the pension fund, In this way, you are not missing out on the growth of the money you borrowed; and
- You are continuing to make pension contributions. In this way you are also adding principal to your pension during the loan period and perhaps not missing out on matching funds from your employer.
If either or both are not the case with you, then a loan like this would not be recommended. You would just be making your own personal financial situation worse, long term.
So What Should I Do?
If you cannot take out a pension loan under the circumstances described, but you need to do something about your debt, you might want to consider bankruptcy. For help in deciding whether this is the best option for you, download my free book, Am I In Too Deep? A Guide to Knowing When You Need to File Bankruptcy in New Jersey.
Want more information on whether bankruptcy is right for you? If you live in southern New Jersey, you should 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.