A recent Reuters report states that 30% of households whose income is $50,000 or less cash out their 401(k) plans when they are desperately in need of cash. Despite the early withdrawal penalties and taxes assessed on 401(k) plan proceeds, consumers are increasingly turning to their hard-earned 401(k) plans when an emergency arises. These types of emergencies might include an unexpected job less, a medical crisis, a work injury, or an unanticipated move. Rather than dipping into an emergency fund or savings account, families are relying on their 401(k) plans, simply because they have no other source of cash.

Among lower and middle-class Americans, in particular, studies show that most do not save at the level needed for retirement, and many do not save at all. Similarly, a recent report by the Corporation for Enterprise Development showed that the number of workers who participate in employer-based retirement plans has dropped in at least 25 different states. As a result, these families may have no choice but to raid what small retirement savings that they already have.

For families in this predicament, who tend to have lower lifetime wages and overall household earnings, one medical emergency or a sudden job lay-off can mean the difference between living in relative comfort and barely scraping by. No person is immune from these events happening in their lives, although some wealthier Americans might be less likely to encounter an emergency such as a devastating job loss. In any case, once a family is facing such an emergency, the reality is that even the proceeds of their 401(k) accounts, less taxes and penalties, may not be enough to help them deal with increased expenses, decreased income, and crippling debts.

When financial hardship leads to debts that quickly have become overwhelming, bankruptcy may be an option that offers a way out. By filing for Chapter 7 bankruptcy, you may be eligible to discharge debts such as medical bills and credit card debt, although some debts, like student loans and back child support, cannot be discharged. On the other hand, if you are gainfully employed, you may be able to take advantage of Chapter 13 bankruptcy proceedings, which can enable you to pay back your debts over a three to five-year time period.

For more information about how bankruptcy may be an option for you, contact your Arizona bankruptcy lawyer for a comprehensive consultation about your financial situation.