Credit Counseling, Bankruptcy or 401k Loans?

The following article is meant to debunk come common myths about bankruptcy, credit counseling and 401K loans.

Bankruptcy Myth #1: Anything is Better than Filing Bankruptcy

Bankruptcy Fact: Bankruptcy is often preferable to credit counseling and debt consolidation alternatives. Many people fear the stigma and process of bankruptcy and instead choose to work with a credit counselor or debt consolidation company. For many this is a huge mistake. In fact, many people end up in worse financial shape than if they had filed bankruptcy from the outset. Others enter into work out plans that are more burdensome than if they had filed bankruptcy, often making payments for months or years with little or nothing to show for their sacrifice.

The problems with credit counseling agencies and debt consolidators, even if they are non-profit agencies is:

1. It is not uncommon for the IRS to investigate a non-profit credit agency. By claiming to be non-profit the agency gives the impression that it is working on your behalf. This is often not the case. Non-profit status doesn't mean they are charities. A non-profit means simply that the entity does not have shareholders that are paid the profits of the company. Often, the officers and those running the corporation are being paid exorbitant salaries and fees which is one of the reasons they may be investigated by the IRS.
2. Some of these companies are funded, in part, by the creditors that you are trying to negotiate with! This should tell you that these companies do not hold your interest first. Some even receive a portion of the payments that they are able to extract from you.
3. A debt consolidator doesn't do anything you cannot do for yourself. Debt consolidation companies simply try to negotiate payment plans or interest rate reductions. They  give no guarantees of success. Also, certain creditors may not work with the companies so the proposed plan may fail.

Bankruptcy Myth #2: It's Better to Deplete 401k's or IRA's Rather than File Bankruptcy

Bankruptcy Fact: Your retirement is for your retirement! It’s for when you are at an age when you are not able to work. It is not a piggy bank or liquid savings account. You may have to pay substantial penalties when taking funds out of retirement for hardship purposes. Further, the repayment of these loans often reduces your paycheck making it more difficult to meet your ongoing obligations.

Here's why bankruptcy might be the right option for you:

Bankruptcy is often superior to debt consolidation because it offers a legal platform for resolution of the problem. Bankruptcy can entirely eliminate debts or propose plans to significantly reduce your debt and/or interest.

It's important to know that most people who file bankruptcy do not lose any of their property. Unlike credit counseling, bankruptcy can stop harassing phone calls, utility shut-offs, garnishments, repossessions, foreclosure sand property seizures. Those that file Chapter 13 bankruptcy typically pay back a fraction of what they owe. Many people are surprised to find that their estimated credit scores often improve just 12 months after filing.

When dealing with overwhelming financial problems, make bankruptcy the leading option you investigate. If choosing a credit counselor or debt consolidators, also make an appointment with a bankruptcy attorney so that you can compare the alternatives. Finally, do not borrow from your retirement plan, save it for your retirement.