Numerous people take advantage of incentives offered by the federal government and employers that encourage people to save for retirement. This may be an IRA, 401(k), 403(b), or other similar retirement account.
When people experience financial hardships they often are tempted to use the funds they have saved for retirement to regain their financial footing. However, people should understand how bankruptcy law treats retirement accounts and why filing bankruptcy may be a better way to deal with debt rather than using retirement funds to pay down their debt.
In order to encourage people to save for retirement and not depend solely on Social Security as their only source of income after retirement, Congress allows people to have some tax advantages for depositing money into certain types of retirement accounts. The law also protects funds in those accounts from creditors, including those trying to get money from a person who has filed bankruptcy.
401(k) accounts are fully protected from creditors during bankruptcy. An IRA is protected up to $1 million.
Borrowing from Retirement Accounts
Some people make the mistake of withdrawing money from their retirement accounts during financial difficulties, in order to pay off debts. However, by doing so they are creating more issues for themselves in the future. If people are not able to repay the loans they take from their retirement accounts, not only do they have to pay income taxes on the amounts they withdrew, they also have to pay early withdrawal penalties. Bottom line is, they may be spending their retirement savings on debts that could be eliminated in bankruptcy.
Additionally, people who do know that retirements funds are protected may not understand that the money loses protection once they withdraw it from their retirement accounts. If a person absolutely must take a loan from a retirement account, such as when a person unexpectedly loses a job and needs the funds to pay monthly expenses, the funds are automatically eligible for creditors to seize once the person transfers the money out of the retirement account and into another bank account.
Speak with Kerry Hettinger
Before exhausting a retirement account in order to pay off overwhelming debts, a person may want to consider filing bankruptcy. People can eliminate several unsecured debts, such as credit card bills and medical debts while protecting retirement funds.
If you are struggling financially and feel like you have no option other than using retirement funds as a means of getting out from underneath crushing debts, speak with an experienced bankruptcy attorney like Kerry Hettinger. Kerry will meet face to face with you to discuss your concerns, and educate you about your debt relief options.
Please accept our invitation to call our office for your free consultation. 269-344-0700.