401(k) accounts generally free from collection


To Her Credit
To Her Credit, Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs. See her website for more personal finance tips and free budgeting worksheets.
Ask Sally a question, or read her previous answers in the To Her Credit archive

Dear To Her Credit,
I had a credit card on which my husband was the authorized user. He was laid off and needed funds to start a business, so without my knowledge he used my zero balance card and ran it up to $30,000 within a few months. The interest rate is 21 percent. Now he can no longer pay the payments, and Chase is calling me. I cannot afford to take over the payments. I am the only one currently with an income and am trying to keep our home bills paid. The account is closed and is now in collections. If I am taken to court, is my 401(k) plan in jeopardy? I had hoped to retire within a year. Please advise, I do not know what to do. My credit has always been excellent until now. -- Della


Dear Della,
I'm sure you've had this discussion with your husband, but nobody "needs" to use $30,000 they don't have to start a new business after they've been laid off. We all take risks in life, but they should be measured risks -- not jumping-off-a-cliff risks.

When your husband lost his job and decided to go into business for himself, he had several options. He could have started a small business that required less cash outlay. Many service businesses cost almost nothing to start. He could have bought and sold items on the side, without going into debt. If he really wanted to start a retail business or something else that required a cash investment, he could have found a less expensive form of financing -- and received buy-in from you before he committed to more debt. Going behind your back and using your high-interest credit card was unconscionable.

The good news for you is that the credit card company cannot seize funds from your 401(k) plan. Under federal law, judgment creditors can't go after money in an Employee Retirement Income Security Act (ERISA) qualified retirement accounts, which include 401(k) accounts. Don't be tempted to raid your retirement plan to pay off this debt. Retirement funds are for retirement. Keep them safe where they are.

Note: Non-ERISA plans, such as IRAs, are also generally safe from creditors, however state laws vary. Seek legal advice in your state if you're not sure whether your other retirement funds are protected.

If you think your husband may find work soon, the best way to deal with this debt may be to communicate with the credit card company and ask for a hardship plan based on your husband's unemployment. They may agree to reduced payments for a time. That's a better deal for them than having you declare bankruptcy or simply give up on paying.

Another option is to negotiate down the debt with the credit card company. Settling to pay less than what you owe will lower your credit score, but it may help you get out of debt in a reasonable period of time. You can negotiate debt yourself -- there's no need to sign up with a debt negotiation company.

I don't recommend bankruptcy for a $30,000 debt, especially when two people are still in their earning years. You and your husband would be better off paying the debt or negotiating it, even if it means delaying your retirement, than going through the stress, expense and trouble of bankruptcy.

One other thing I would recommend is that you check all your other credit cards and make sure they have reasonable limits. You can ask to have limits reduced or close credit cards that you no longer need. Lowering your total available credit will probably lower your credit score in the short term, but I'd consider that a small trade-off for also lowering your husband's temptation to get the two of you further into debt.    

See related: Financial infidelity poll: 6% hid bank account from spouse or partner, Is husband liable for wife's $50,000 card debt?, Near retirement age is the worst time to raid 401(k) 

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Published: April 24, 2015

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