Early Withdrawal

Question: Should I borrow from my 401k to pay down credit card debt?

I am 25 and am thinking of borrowing from my 401k to payoff my credit cards which are many months behind. There is about $5000 in there and my debt is about $3500. Also I am thinking of changing jobs soon and I know they will either send you a check for your balance less Early Withdrawal Penalties or let you roll it over. If i was to change jobs would paying the penalties be a better decision than to continue to let my debts go unpaid. Thank you for time and thoughts.

Answer: There are big penalties for cashing out a 401K. How many months is “many” months?

Do whatever you can to prevent the cards from being charged-off…this happens at the 5 – 6 most past due mark….A charge off really damages your credit and when it happens the damage is done and there’s no undoing it…it will stay for 7 years on your credit report….even if you pay the debt back in full. If your cards have not yet charged off…..and cashing out the 401K would help to prevent charge-offs, then I would say “yes,” cash out the 401K to settle the debts… even with the cash out penalties…because you’d be averting long term damage to your credit rating. FYI: If you are many months behind on your credit cards…then you’re credit rating is already damaged anyway regardless of whatever you do….

If you are “many” months behind, then you may want to try to settle for less…make offers starting @ 30% and go from there. Only do this if you can pay any settlement up front…..Don’t waste your time if you can only pay a settlement in small amounts over several years…they aren’t interested in these payment terms for settlements…they’d want them paid up front. Get all terms for any settlement up front BEFORE you pay….then pay with a money order or cashier’s check. Don’t give them your checking account numbers.
If your cards have already completely defaulted – http://sites.google.com/site/catdadsadvise/

401k Planning – Early Hardship Withdrawal Rules