Many people needlessly use retirement assets to avoid bankruptcy.
It doesn’t take an expert to tell you that financial pressure can push people to commit all sorts of desperate acts. Thus, when someone is experiencing nasty debt collection calls and threats of foreclosure, he or she is easily tempted to look for other sources of funding to help make it go away. One such source of funds that many look to is their retirement funds. Although raiding these funds may make sense in the short term, in the long term doing so can actually weaken your situation. In many cases, it is better to consider bankruptcy to deal with the outstanding debts.
Withdrawing funds from your retirement accounts is generally a poor idea for two main reasons. The first reason is that doing so will cost you money on top of the amount you withdraw, as early withdrawals in these accounts can lead to penalties and tax consequences.
The other reason why touching your retirement assets to pay off your debts is an unwise move is the assets in these accounts cannot be touched by your creditors if you file bankruptcy. As a result, you would give your creditors money that they are legally not entitled to if you use your retirement assets to pay off your debts instead of letting bankruptcy take care of them. Under Tennessee and federal laws, the types of accounts that are exempt include:
- 401(k)s and 403(b)s
- Keogh plans
- IRAs (both Roth and Traditional are exempt up to $1,245,475)
- Other defined benefit plans
Since the law protects these accounts from your creditors in bankruptcy, you get to keep them throughout the process. Once you have completed bankruptcy, you are free of most other debt, but still have your retirement assets.
Although retirement accounts are generally exempt from your creditors, the exemption is not absolute. If you attempt to defraud your creditors by transferring assets to your accounts before you file bankruptcy, the court may revoke your exemption. As soon as you file bankruptcy, all of your recent transactions are scrutinized. If there are any irregularities, the court may lift the exemption on your accounts, allowing creditors to apply the funds within towards your debts.
Talk to an attorney
Due to the treatment of retirement accounts in bankruptcy, there is no need to mindlessly sacrifice what you have worked your whole life to save for the sake of your debts. Depending on your situation, Chapter 7 or Chapter 13 may be able to take care of your debt problem, while preserving your ability to retire one day.
To learn more about the debt relief options available to you, talk to an experienced bankruptcy attorney. An attorney can review your circumstances and tailor a solution that would be best for you. Our firm has successfully defended retirement account funds, 401-k funds, 403-b funds, and IRA accounts from claims of creditors for many years. We are happy to meet with you to discuss the particular issues of your case.