Q&A with a Chicago Bankruptcy Attorney–Borrowing from a 401(k)

Q:      My wife and I are in our late 20s with a mortgage and almost $20,000 in student loan debt between the two of us. We each have 401(k) plans we have contributed to-should we cash one out to pay off student loan debts?

A:      It may be very tempting to cash out a 401(k) to pay off any debt, including student loans and mortgages, but it is probably not in your best interests for your long-term financial security. If you do withdraw money from the 401(k) early, you will have to pay a 10 percent penalty on whatever you withdraw in addition to your tax rate. Hypothetically, if you make more than $75,000 annually, you will pay your 25 percent tax rate in addition to the 10 percent penalty. If someone tried to get you to sign off on a loan at 35 percent interest to pay off the student loan, you would think that person was out of his mind.

People who have large student loan debt on top of other debt may want to look at bankruptcy get rid of dischargeable debt and focus on paying back the student loan debt, which is rarely dischargeable in bankruptcy. Contact or firm for more bankruptcy information.

Benjamin Brand Services-Chicago bankruptcy lawyer.

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