Can we use a 401K to prevent foreclosure and bankruptcy? 26 Answers as of August 04, 2011

Can we use our Vanguard 401k to pay off a $3500. second mortgage so that we can do a deed in lieu to prevent foreclosure and bankruptcy.

Ask a Local Attorney. 100% Anonymous. Free Answers.

Free Case Evaluation by a Local Lawyer: Click here
Melinda Murphy Dionne, PC
Melinda Murphy Dionne, PC | Melinda Murphy Dionne
If your 401K plan allows you to borrow money against it to save your home you may be able to do that. However, it is never a good idea to use funds which are beyond the reach of your creditors. This is especially true when you are talking about letting the house go back through a deed in lieu of foreclosure. Talk to an experienced bankruptcy attorney who can advise you of the options that exist for you. Most bankruptcy attorneys offer free initial consultations so what do you have to lose but an hour or so of your time? You stand to gain a great deal from good advise and you may save your pension funds.
Answer Applies to: Alabama
Replied: 8/4/2011
Benson Law Firm
Benson Law Firm | David Benson
Yes. But remember that your qualified 401k funds are 100% exempt should you decide not to go that route and that withdrawn 401k funds are taxed fairly heavily. -
Answer Applies to: Ohio
Replied: 7/15/2011
Financial Relief Law Center
Financial Relief Law Center | Mark Alonso
If would like to avoid foreclosure and prevent bankruptcy, you may be able to take funds out of your 401k (if you have enough funds and if your 401k will allow it) and then apply those funds to pay off debt as you like. If you have additional debt however, such as unsecured credit cards, you will be stuck with that debt and have already paid the second mtg. off, when maybe you could have filed bankruptcy and obtained a discharge on everything.
Answer Applies to: California
Replied: 7/15/2011
Apple Law Firm PLLC
Apple Law Firm PLLC | David Goldman
You can, but it may not be wise or the best use of a 401K fund that is protected from creditors. You should discuss this with an attorney to determine your options
Answer Applies to: Florida
Replied: 7/15/2011
Law Office of J. Thomas Black, P.C.
Law Office of J. Thomas Black, P.C. | J. Thomas Black
If your 401(k) plan administrator allows loans or hardship withdrawals, then yes, I suppose you could request a loan or withdrawal for the purpose of paying a second mortgage. But to do so in order to do a "deed in lieu of foreclosure" seems odd, particularly here in Texas. Foreclosure is relatively quick and easy here in Texas, and does not usually require the mortgage company to go to court, unless it is a home equity loan. Therefore, it is unusual for a mortgage company to permit you to deed the house back to them, in return for extinguishing the debt. They usually want to conduct the non-judicial foreclosure sale, which also gives them a better title by cutting off any other liens or claims against you that may have arisen since you obtained the property. However, if your mortgage company has agreed to a deed in lieu, and they will release you from any responsibility for the mortgage debt, that may be a good idea. And if you have no other debt issues, paying off the second mortgage may be a good idea as well. I recommend that you consult with an experienced consumer bankruptcy or real estate lawyer to discuss your situation and possible pitfalls. For example, you may have income tax consequences from a deed in lieu of foreclosure. See I.R.S. Publication 544, and/or consult with your tax advisor. Incidentally, if the property is in Texas and the second mortgage is a home equity loan or home equity line of credit, you have no personal liability for the loan. The lender's only recourse is against the property. Again, I recommend that you have your paperwork reviewed by an attorney to make sure.
Answer Applies to: Texas
Replied: 7/14/2011
    Janet A. Lawson Bankruptcy Attorney
    Janet A. Lawson Bankruptcy Attorney | Janet Lawson
    You can. But are you asking about 35k or 3500.00? I never think using your 401k is a good idea. A deed in lieu has to be accepted by the lender and generally they do not accept them. You could spend the 401 money and still wind up with a foreclosure or bankruptcy, plus the tax consequences.
    Answer Applies to: California
    Replied: 7/14/2011
    Carballo Law Offices
    Carballo Law Offices | Tony E. Carballo
    Yes but you will have to pay taxes on the 401k withdrawal and maybe a penalty if under a certain age. A deed in lieu of foreclosure has to be accepted by the bank and it may not be accepted. Usually banks will not accept deeds in lieu of foreclosure. There is no personal liability in California for a deficiency after foreclosure if the bank forecloses by nonjudicial trustee's sale and in almost all cases. There is also no deficiency after foreclosure if it is your personal residence. A deed in lieu damages your credit just like a foreclosure, short sale and bankruptcy. You really need to consult with a bankruptcy lawyer to explore the options. The lawyer needs to know your entire financial situation to advise you as to the best option in your case.
    Answer Applies to: California
    Replied: 7/14/2011
    Indianapolis Bankruptcy Law Office of Eric C. Lewis
    Indianapolis Bankruptcy Law Office of Eric C. Lewis | Eric Lewis
    If you're using a 401(k) which should be a nest egg, for the purpose of preventing foreclosure, you probably have more issues going on in the bigger picture and bankruptcy might be a better solution.
    Answer Applies to: Indiana
    Replied: 7/14/2011
    Rosenberg & Press
    Rosenberg & Press | Max L. Rosenberg
    Why? The money in the 401k is exempt from judgments, bankruptcy, attachments, etc. If you are giving up the property anyway, save your money and do a short sale.
    Answer Applies to: Connecticut
    Replied: 7/14/2011
    Law Offices of John J. Ferry, Jr.
    Law Offices of John J. Ferry, Jr. | John J. Ferry, Jr.
    Possibly. If you are fully vested, you can use the money, but you will have to pay taxes and penalties. However, if you are talking about paying off the second mortgage just so you can turn over the property to the first mortgage holder, I doubt that is a good reason to give up your retirement savings. You should discuss this with a bankruptcy attorney before you make a decision.
    Answer Applies to: Pennsylvania
    Replied: 7/14/2011
    Law Office of Lynnmarie A. Johnson
    Law Office of Lynnmarie A. Johnson | Lynnmarie Johnson
    Most 401k plans have a clause that allows you to withdraw money to prevent foreclosure, but beware that the 10% penalty and taxes are not waived.
    Answer Applies to: Michigan
    Replied: 7/14/2011
    Tucker Legal Clinic
    Tucker Legal Clinic | Samuel Tucker
    You should be able to withdraw funds from your 401k. There will Likely be penalties and taxes due. The remaining elements of your question need clarification. A deed in lieu results in dispossession of your house in the same way a foreclosure does.
    Answer Applies to: Mississippi
    Replied: 7/14/2011
    Bankruptcy Law office of Bill Rubendall
    Bankruptcy Law office of Bill Rubendall | William M. Rubendall
    If you are going to access your 401k for a non-retirement purpose you should consider the consequences, including tax impact. Also consult with an accountant, preferably a CPA, as to tax consequence of giving up you property.
    Answer Applies to: California
    Replied: 7/14/2011
    Uriarte & Wood, Attorneys at Law
    Uriarte & Wood, Attorneys at Law | Robert G. Uriarte
    You could, but why. You need to sit down with a lawyer and discuss your best option. It may not be bankruptcy, but it may not be borrowing form you retirement account either. Most attorneys will not charge you for a consult. Take advantage of it.
    Answer Applies to: California
    Replied: 7/14/2011
    Law Office of Maureen O' Malley
    Law Office of Maureen O' Malley | Maureen O'Malley
    This is actually a huge question. First, there'll be hefty tax consequences to using your 401. Second, a Deed in Lieu is just as bad as a bankruptcy.on your record and is very hard to get the bank to agree. What about other debts? You might be able to step the 2d in a Chapter 13. Bankruptcy is not only not the end of the world, it's a veritable life-saver in some instances. Please go see a Bankruptcy attorney for specific guidance.
    Answer Applies to: Virginia
    Replied: 7/14/2011
    Colorado Legal Solutions
    Colorado Legal Solutions | Stephen Harkess
    If you are not of retirement age, you will have a penalty for early withdrawal from your 401(k). If you are able to pay the penalty and use the money to cure the mortgage, you are allowed to do this if it will keep you out of bankruptcy. However, you want to make sure that you will be able to avoid bankruptcy if you access the money because the 401(k) money would be protected in bankruptcy. You don't want to take that money out if you will end up filing bankruptcy for other reasons anyway.
    Answer Applies to: Colorado
    Replied: 7/14/2011
    Dan Shay Law
    Dan Shay Law | Daniel Shay
    Yes, you can if you want. But, I urge you to consider a Chapter 13 Lien Strip to forcibly remove the 2nd mortgage. At least try to settle the 2nd for half of what is owed in return for release of the lien.
    Answer Applies to: California
    Replied: 7/14/2011
    The Schreiber Law Firm
    The Schreiber Law Firm | Jeffrey D. Schreiber
    You can, but you also have to weigh in the 10% penalty for early withdrawal AND that the amount you withdraw will also be income and you will have to pay income taxes on the withdrawal as well.
    Answer Applies to: California
    Replied: 7/14/2011
    Ashman Law Office
    Ashman Law Office | Glen Edward Ashman
    That sounds like about the worst thing you could do. Why would you consider it? First of all, few lenders accept a deed in lieu. So you probably get foreclosed on anyway. And drawing on your 401K is frankly dumb. First of all you pay penalty taxes, so at least 40% of your withdrawal goes to the IRS. That means you have flushed 40% of your retirement down the toilet. Second, if you file bankruptcy instead of doing this you can wipe out the house, and KEEP the 401K. And if you are already facing foreclosure, your credit already is poor, so you may not even hurt your credit much with a bankruptcy. See a bankruptcy lawyer to compare his ideas with yours.
    Answer Applies to: Georgia
    Replied: 7/14/2011
    The Northwest Debt Relief Law Firm
    The Northwest Debt Relief Law Firm | Thomas A McAvity
    I am sure you can but I think it is most likely a pretty poor idea.
    Answer Applies to: Oregon
    Replied: 7/14/2011
    Mercado & Hartung, PLLC
    Mercado & Hartung, PLLC | Christopher J. Mercado
    Be aware of any tax liability that may occur.
    Answer Applies to: Washington
    Replied: 7/14/2011
Click to View More Answers:
12 3 4 Free Legal QuestionsConnect with a local attorney