I'm 37 and unemployed with $60,000 in credit card debt — and my penniless mom depends on me. Is it best to cash out my 401(k) or declare bankruptcy and start over?

Long-term consequences

Bankruptcy seems like a desperate solution, and it often is one. It can remain on your credit report for a decade if you file for Chapter 7 bankruptcy or for seven years with Chapter 13 — you may have heard of Chapter 11 bankruptcy, but this is primarily for businesses. You'll have a hard time getting approved for loans, may pay more for insurance coverage and may not find landlords eager to rent to you with a bankruptcy history.

However, there's a reason bankruptcy laws exist. Consumers sometimes reach a point when they have so much debt relative to income that there's almost no way to dig out of it. If a person's payments only barely cover the interest they could potentially be in debt indefinitely. In this situation, continuing to pay just throws good money after bad.

What's more, if you try to avoid bankruptcy by cashing in a 401(k), you may make your long-term financial situation much worse. An employer-sponsored 401(k) is protected in bankruptcy so creditors can't take the funds and there's a good reason for that. These accounts are crucial to financial security as a senior.

Cashing out your 401(k) early may also compound the problem. There's a 10% early withdrawal penalty if you take money out before age 59-and-a-half and you'd also be taxed on the distribution as ordinary income. You may not have enough to fully repay all you owe, especially after accounting for taxes and penalties, and would still be struggling. Plus, you'll lose out on potential investment gains.

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Exploring other alternatives

Before taking the drastic step of either declaring bankruptcy or cashing out your 401(k), you should explore other options first.

In some cases, if you're caring for an older family member you can qualify for payments as a family caregiver through Medicaid. Your older loved one may also be eligible for Supplemental Security Income to help the household if income is limited.

These programs could provide some breathing room to start paying down your debt.

You may also be able to better manage your debt by talking with your creditors about debt settlement or a payment plan. If you're behind on payments and creditors know you're at risk of bankruptcy, they may be inclined to work with you.

It's not recommended to use a debt settlement company in many cases. The Consumer Financial Protection Bureau says these outfits commonly charge high fees and under-deliver. Instead, call your creditors to tell them you're struggling and find out what options you have.