Years back I had a man who had his DWI reduced and he failed the driver intervention program. He failed on the first question of the test. They asked, “What is the first thing you do when you get into your car?” His answer: “Turn on the jams (radio).” Lacks a certain amount of common sense doesn’t it?
How about you? What is the first thing you do when you lose your job? This is not an exam question. It is real life. Most people fail. They empty the 401k. Why not? The only way you can usually get the money is if you sever your employment relationship. Nothing like a big, taxable lump of money to ease the pain. Keep your 401k where it is.
401k is just for retirement
The mistake in this approach is that your 401k is for your retirement. There is a reason it is so hard to get at. As long as it is in your retirement account it is safe from marauding creditors. No one can garnish or attach it. Take it out and the protection is gone. You are even more dangerous to your retirement funds than the people you owe money. Only you can spend it foolishly and have absolutely nothing to show for it.
If you lose your job and need to file bankruptcy, keep your 401k. If you have to move it, transfer it to a rollover account directly. If it stops off in your personal account on the way you lose the exemption protection. That means that not only can your creditors take it before you file, but your trustee will be entitled to recover the funds for the benefit of all your creditors as a group.
Wait to take money, if you need it, until after you file
Once you file the bankruptcy case, if you still want the money, you can withdraw it once your attorney gives you a bankruptcy case number. Remember, your case is not filed until you have signed the petition and your attorney has provided you with the case number. Merely meeting with a lawyer, signing a contract, and maybe giving him money is not filing.
I don’t like beating a dead horse anymore than you like seeing it happen. I have written on this before. I witness clients who make this mistake time and time again. Sometimes they make the mistake before they ever call me for a bankruptcy consultation, others do it after we meet, and then try to hide it. Listen to me, and keep your 401k.
Do not cash out your retirement funds before you get a bankruptcy case number
Is that clear enough?