Can I use money from my 401K to pay off debts so that I don’t have to file bankruptcy?

UPDATED: Jul 16, 2010

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Can I use money from my 401K to pay off debts so that I don’t have to file bankruptcy?

Is this possible? Is it advisable? Or should I threaten to do so? Would there be any adverse income tax consequences? If I go bankrupt would my 401K money be protected? 

Asked on July 16, 2010 under Bankruptcy Law, Alabama


M.T.G., Member, New York Bar / FreeAdvice Contributing Attorney

Answered 12 years ago | Contributor

In Bankruptcy you have to choose between taking the exemptions permitted under your state law or the exemptions permitted under federal law.  Sometimes one may be more advantageous that the other depending on your personal circumstances.  Generally, 401 K plans have what is known as an "anti alienation" clause that precludes them from the bankruptcy estate.  In other words, they can not be touched by creditors.  Pulling out money early from a 401K can have serious tax consequences.  I would strongly suggest that you seek help from a debt counseling service in your area or a bankruptcy attorney before you make any decisions on how you are going to manage the debt.  Take a deep breath.  It is always darkest before dawn.  Good luck.

IMPORTANT NOTICE: The Answer(s) provided above are for general information only. The attorney providing the answer was not serving as the attorney for the person submitting the question or in any attorney-client relationship with such person. Laws may vary from state to state, and sometimes change. Tiny variations in the facts, or a fact not set forth in a question, often can change a legal outcome or an attorney's conclusion. Although has verified the attorney was admitted to practice law in at least one jurisdiction, he or she may not be authorized to practice law in the jurisdiction referred to in the question, nor is he or she necessarily experienced in the area of the law involved. Unlike the information in the Answer(s) above, upon which you should NOT rely, for personal advice you can rely upon we suggest you retain an attorney to represent you.

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