From Retirement Fund

In USA the retirement plan qualified under 401(k) usually provides borrowing from that fund up to 50% of the value accrued in that account subject to a ceiling whichever is less.

If one is a participant of this retirement plan, he can borrow from this account to liquidate high interest debts like credit card loans. Interest rate on this loan being a little higher than prime rate makes it viable to avail of this loan facility to pay off loans with high interest tags.

The unique aspect of the 401(k) loan is that the interest paid on the loan is ploughed back into the borrower’s retirement fund account and not received by the lender. That makes it doubly attractive. However there are certain things to be careful about regarding 401(k) loan. This loan must be repaid before retirement; otherwise it would be treated as distribution and taxed accordingly.

Also at the time of withdrawal from 401(k) on retirement, interest on the loan credited to the account will be taxed. Penalty by way of excise tax would also be levied for early withdrawal from retirement fund if one retires before attaining 59 ½ years of age.

Asking for Renegotiated Terms

Renegotiating credit terms with lenders can be considered the last straw before throwing in the towel and filing for bankruptcy. The creditors may be approached for re-phasing the loan with lower interest rate and repayment schedule.

The debtor must honestly make his intention clear to repay the dues if this is done by the lender. The creditors also do not like the prospect of the borrower going for bankruptcy causing total loss to them as they have to write off the debt. There are organizations that help the borrower in the process of renegotiation with creditor.

Bankruptcy

If repayment appears impossible even after exploring all the avenues, the only option before the debtor is filing for bankruptcy. However this also involves engaging lawyers and incurring large expenses. Wherefrom the money will come for one in debt?