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If credit counseling didn't help bankruptcy may be the answer

Although the economy is said to have recovered, many Texas households are suffering continued financial difficulty. Debt that accumulated during the devastating recession may now be overwhelming, leaving consumers despondent and desperate. Individuals who are proactive in exploring options such as credit counseling and bankruptcy may find a way to resolve their dire situations.

A recent consumer question to a financial advisor likely reflects the dilemma of many others. The man described how his real estate-related business had dropped significantly, leaving him unable to keep up with household expenses and debt payments. While he has started delving into the family's savings, he realizes that this source will soon dry up. His only other option is to use his 401(k) and he would rather avoid such a drastic step.

Drawing one's 401(k) is a step one should avoid at all costs. Such a step may only postpone the inevitable by buying the individual some time and then the family could be right back in the same desperate situation again. However, the only difference will be that there will be nothing left of the individual's retirement fund, and in addition, there will be significant penalties charged for the premature 401(k) withdrawal, along with a hefty tax bill. Couples may benefit from exploring all avenues to create more funds, such as part-time jobs for both spouses or moving to a cheaper apartment while renting their home for some time. Another option is to arrange a consultation with a credit counselor.

However, if even credit counseling cannot solve the predicament, it may be wise to gain some knowledge about the protection that personal bankruptcy offers to the residents of Texas. Individuals who have a regular income may file for Chapter 13 bankruptcy. This will afford them the opportunity to repay their debts over an extended period of between three and five years. During this time, if the debt is affirmed, the person's 401(k) will be protected and the residence will be protected against foreclosure.

Source: Chicago Tribune, "Credit counseling, not draining retirement account, is answer to debt spiral", Ilyce Glink and Samuel J. Tamkin, June 26, 2014

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