What is not stated in your question is the amount of the default judgment. Perhaps it is a relatively smalll amount which is the reason why you decided to ignore it rather than defend it? Actually, there is nothing wrong with that approach if you agree with the amount owed, but don't want to incur the cost to defend it.
Debtors often go around with judgments against them without having to file for bankruptcy. Bankruptcy should be your last resort. Sometimes you can claim exemptions in a wage garnishment if you need the wages for the basics of life.
You should also know that it is often possible to satisfy (settle) the judgment for significantly less than the judgment amount. An possible strategy is to have a bankruptcy attorney negotiate a settlement for you. You will need to consult with a bankruptcy anyway to determine whether you are qualified to file for bankruptcy.
I discuss your options in a video on my web site. Also, I recently prepared a blog posting about how to deal with a default judgment. Yes, you have options to bankruptcy. Please view my video and if you need further consultation, please complete the information for a free eCase Review on my web site.
I saw you had an additional question about your new wife's wages. No, they cannot garnish her wages, as you incurred this debt before you were married. Also, the judgment is not in her name, so they cannot touch her wages, as the debt is considered "separate" not a community debt.
Often creditors will settle for 25 to 50 cents on the dollar, even with a default judgment. Another option is to declare bankruptcy (you would need to speak with a bankruptcy attorney to see if that is a good option for you). Also, a bankruptcy attorney needs to look at the judgment to make sure it is dischargeable in a bankruptcy. And if you wait until the lender garnishes your paycheck, then it gets to be even more difficult to file for bankruptcy because the lender can take 25% of your pay in California.
Finally, the most important part of your question is the part about taking money out of your 401K to pay off this debt. If you take money out, you will owe taxes and penalties on that money. I have many clients who did just that and the taxes and penalties forced them into a bankruptcy. None of them could get out of their taxes in bankruptcy but the tax burden was so high that they could not afford to pay their other bills. And if you take out a loan from the 401K, you will still need to pay that back (which may or may not be equal to a garnishment).
As you can see, there are a lot of factors at play here and you are smart to be asking questions now rather than later!
Please note that although this answer may provide information concerning potential legal issues, it is not a substitute for legal advice from qualified counsel. You should consult an attorney for individual advice regarding your own situation. Answering this question does not create any attorney-client relationship between you and Kelly Zinser, Shareholder at Olenicoff & Zinser, PC in Irvine, California. For more information on bankruptcy, please see our website.