I meet with a lot of people who are scared to consider bankruptcy because they are afraid they will lose their retirement money. This is not the case. Money in qualified retirement accounts (IRAs, 401Ks, etc.) are 100% protected in a bankruptcy. This means that even if you have to file for bankruptcy because of credit card or medical debt, when you list your retirement account balances, the court cannot touch that money. It will not be liquidated to pay your creditors.
Since retirement accounts are exempt from your creditors in a bankruptcy, cashing them in to pay unsecured debt is not something to take lightly. If you cash in your retirement account and use this money to pay down credit cards, you should be sure that doing this is going to get your out of debt and back on track. If it doesn’t, and you find yourself in bankruptcy afterwards, this money is spent and the debt you paid down would have been dischargeable in your bankruptcy.
I’m not saying that it’s always a bad idea to use retirement money to get yourself out of a jam, if you take a 401k loan and pay yourself back from each paycheck, you are only temporarily depleting your account and will eventually pay yourself back the money you borrowed.
Taking your retirement money out as an early withdrawal, though, is a different matter. There is a tax liability to consider, which many people defer to the end of the year, only to find that the amount is too high for them to cover and they end up owing the IRS instead of Visa. In addition, this money is no longer in your account, being invested and earning interest, so the funds you will have at retirement are significantly less.
If you find yourself considering cashing in your retirement account to pay down your debt, speak to a bankruptcy attorney before you do. You can then say that you explored all your options prior to making the decision. Greenwald & Hammond offers a free consultation with an attorney to discuss debt options. Call today to schedule an appointment.
Kerry Hammond, Esq. Bankruptcy Attorney