[lovestosing6]

We live in California and have a home in Michigan which is about to foreclose. At the same time we are thinking about paying off all these high interest credit cards with our 401K (we know we will take a 20% hit, but the low interest rates got blown sky high due to a new online banking thing that didn't work right the first damned month... sorry, I digress). Now I'm thinking, if we use our 401K to pay off the cards and we end up having to bankrupt because the bank comes after us on a short sale or something, then why spend the 40K on paying off credit card debt? Will it make our recovery easier if we've earnestly paid off our debt before being forced to do something like foreclose?

[peter030205]

I wrote mortgages a short time ago. Not sure how the industry has changed, but from my experience it was 100x easier to get someone qualified for a new mortgage after a bankruptcy discharge as opposed to a foreclosure. Foreclosures were impossible to get anything other than sub-prime mortgages (which AFAIK are pretty much non-existant now). Of course since you'll already have one foreclosure on your record I'm not sure if it will make a difference to have two, or to have one plus the bk. I'd contact a bankruptcy attorney as well as a financial advisor to see what your best option(s) will be. Good luck!

I live in MI, so I know how tough it is on everyone right now.

[progunr]

Bankruptcy is not what it used to be.

In most cases, even filing bankruptcy, you will still be required to pay back most of the debt, they just give you a longer period to do so based upon the debt and income status.

Were it me, I would keep the 401k for now, try to keep the credit cards at least paid current to avoid all the excessive late fees and interest increases.

If the foreclosure takes place, and the home sells short, perhaps you can cover the balance with the 402k which might help in the near future. I think a foreclosure, with the shortage from sale paid in full would look better to a potential lender than a foreclosure, outstanding balance on a mortgage, and possible suit, garnishment, well... you get the picture.

Good luck with this!

[Fr_Chuck]

First I am sorry for such bad and incorrect advice.

There are two types of bankrutpcy, the types have not changed, but there are now rules for qualifing for them and some limitation

In a chapter 7, all of the debts ( allowed) are discharged and no you do not make any payments on them. They can discharge your credit cards and the foreclosure amounts.

A Chapter 13 is a payment plan where you will make payments toward the debts. Secured debts are paid at value, but non secured debts would be paid at a percentage from 30 to 70 percent is normal but it is based off your income and budget.

Also on your 401K you would have to pay the tax ( which is around that 20 to 25 percent depending on your tax bracket) but would also have to pay a 10 percent penalty. So you will lose 30 or more percent of what you take out just in taxes and penalties. I would not recommend that. If you are not making good on your money in the 401K, you need to look at that as to how you have the funds picked.

Niether is good for your credit rating, but if you are going to have a lot of late pay on credit cards and late pay on home note, I doubt if either will have that much difference,

You should go talk with a bankruptcy attorney, call first, some (not all) will give you the first visit free.

[ScottGem]

Do NOT withdraw the 401K money to pay off your debts. Instead take a loan against it. The interest rates on 401K loans is geitnerally low and you are paying the interest to yourself.

Its not a 20% hit. The 20% is just the amount of withholding against your tax liability. There will be an additional 10% penalty and your tax liability may be higher that 20%.