Exempt Property

• One of the factors you need to consider when making this decision is that your 401(k) is exempt from bankruptcy proceedings. The money in your 401(k) cannot be taken by creditors in order to satisfy a debt. This means that if you are thinking about filing bankruptcy, you do not have to give up the money in your retirement account; the bankruptcy court will not take it anyway. This is one of the few sources of funds that you can keep during this process.
  
  

Size of Account

• The size of your account will also play a role in making the decision. If you have a very large account balance, it may not be wise to cash it out for your debt. It most likely took you many years to build up to this point and if you cash out your account, you may not get to retire on time. This could make it necessary for you to work many more years just to rebuild your retirement account.
  
  

Costs

• When you cash out your 401(k), this is not a procedure that can be completed for free. The money that you take out of your 401(k) will be subject to taxes and penalties. You will have to pay a 10 percent early distribution penalty on the total amount that you withdraw. Once you take out the money, you will also have to count it toward your annual income for that year and pay taxes on it at your regular marginal tax rate.
  
  

Rebuilding Your Credit

• When you file for bankruptcy, it will remain on your credit report for 10 years. During the first few years after filing bankruptcy, it may be difficult to get favorable terms for financing. If you go to work immediately rebuilding your credit, you can rebuild it to a respectable level within one to three years. If you had a large amount of debt to pay off with your 401(k), it will most likely take you much longer than one to three years to build your retirement portfolio again.