By Bob Negele
As the glacially-slow unfolding of the subprime mortgage and housing foreclosure crisis progresses, bankers and Wall Street traders are looking for answers for the future in any place they can find them. The latest of course is the fire sale of investment bank Bear Stearns at $2 per share to JPMorgan Chase.
Homeowners, too, are scrambling to find ways to keep their homes and avoid foreclosure, which has become a tragic reality for many Americans over the past year. A recent USA Today article focuses on desperation attempts by homeowners to avoid foreclosure by tapping into their "untouchable" 401(k) retirement accounts.
Of course, the 401(k) accounts are not really "untouchable," but only treated that way because of the extremely high penalties and fees that holders must pay in order to access the money held in those investment accounts.
Money may be "borrowed" from the accounts at special rates, and then paid back, but many investment account holders are choosing instead to actually cash in their retirement accounts, accepting the extraordinary fees and penalties.
These "hardship withdrawals" require the portfolio holder to pay taxes due on the balance to be withdrawn (unnecessary while under the protection of the 401(k)) as well as a penalty of 10% in some cases if they are under the age of 60. Many businesses also prevent employees from making withdrawals for the first six months after their accounts are created.
Yet, the hardship withdrawal consequences are not stopping the growing popularity of the idea. Just considering one instance, the USA Today article mentions that Merrill Lynch has seen an increase of 23% in hardship withdrawals over the course of 2007, with the number one reason given on applications for the withdrawal being stopping foreclosure or eviction.
If you are facing foreclosure and are considering making a "hardship withdrawal" as a last resort, you should make sure you examine all of your options before making this important financial decision.
Though you may be able to save your house by using the money from your 401(k), you should consider that you'll have just that much less in your 401(k) on the day you retire. And when you take into account the steady march of inflation before now and your retirement date, that total remainder begins to look like less and less.
Chapter 13 is another alternative to foreclosure for some individuals who have gotten behind on mortgage payments.
Under the provisions of the U.S. Bankruptcy Code, you may establish a repayment plan to catch up on these past due amounts over a period of 3-5 years.
Regardless of the financial decision in particular, the fact that many homeowners are forced to consider such drastic measures shows not only the depth to which the economy has sunk but the widespread effects that it has had and will continue to have in 2008.
Learn about your options by speaking with a Total Bankruptcy sponsoring bankruptcy lawyer for free: