Why using retirement assets to avoid bankruptcy is a bad idea

Using retirement assets to avoid bankruptcy is not advised in most cases.

When many people get into debt problems, they think it is their duty to do what they can to pay off their debts. Because of this, many will eventually look to their retirement accounts as a way to pay their credit card bills or stop foreclosure instead of considering bankruptcy. Although paying off bills may seem like a worthy goal, using your retirement assets in this manner instead of filing bankruptcy can be a foolish and needless act of financial self-sacrifice, as it can make your long-term financial situation significantly weaker.

One reason to avoid raiding your retirement assets is that it will cost you. If you withdraw money from these accounts, you are immediately hit with early withdrawal penalties. Additionally, you will likely incur tax consequences. As a result, a portion of your retirement assets is already lost before a bill has even been paid.

Another reason why bankruptcy should be considered to deal with your debt problem is that most of your retirement accounts are exempt in bankruptcy. This means that your creditors cannot reach the money in the accounts to pay your outstanding debts. Under the law, exempt retirement accounts include:

• 401(k)s

• 403(b)s

• Pension plans

• IRAs (both Roth and Traditional are exempt up to $1,245,475)

• Keogh plans

• Most defined benefit plans

Since these accounts are exempt during bankruptcy, you can keep the entire balance throughout the bankruptcy process. During bankruptcy, most of your debts are discharged or reorganized, depending on the type of bankruptcy you file. Once you have completed the process, you emerge with retirement assets intact and free of most of the debt that got you into trouble.

Although most retirement accounts are exempt, the exemption is not absolute. Many people try to take advantage of this exemption by transferring other assets into these accounts just before filing bankruptcy. However, doing this can cause these accounts to lose their exemption status, as all transfers into the accounts occurring months before the bankruptcy is filed are scrutinized. If any irregularities are found, the court may order the accounts opened to creditors.

Speak to an attorney

Since your retirement accounts are exempt, there is no reason to use the money that you have saved your entire career to pay off your debts. Unfortunately, many people with good intentions make this mistake, which can significantly dim their retirement prospects.

When faced with mounting debts, it is important to act quickly to know your options. The experienced bankruptcy attorneys at Goldman & Beslow, LLC can assess your situation and recommend the best way to remedy it.