Keep Retirement in Bankruptcy
Keep Retirement in Bankruptcy
Keep to Keep Your Retirement in Bankruptcy
You can generally keep your retirement accounts safe in bankruptcy. Most retirement accounts, IRA, 401K, 403b accounts, and similar ERISA qualified accounts are totally protected in bankruptcy. Using your retirement funds to pay debts that you could wipe out in bankruptcy is often a bad idea. And, to make matters worse, you normally have to pay tax, and a penalty, when you withdraw money from your retirement account.
Using retirement funds to pay debts is normally a bad idea
When your debts are more than you can handle, it is natural to consider using your retirement funds to get out of debt. This is almost always a bad idea. You can keep your retirement in bankruptcy, and wipe out debts. Even if your retirement fund is more than enough to pay all your bills, it is still protected in bankruptcy.
The Courts do NOT consider it “bad faith” to file bankruptcy and keep your pension. After all, it’s your retirement! You need this money to pay your expenses later in life.
Bankruptcy protects retirement accounts
There is a public policy reason to allow you to wipe out your debts and keep your retirement protected. You depend on your retirement account to be there for you when you retire. Therefore, there is a nearly unlimited protection for Erisa qualified retirement accounts.
These are accounts that you generally cannot access without a penalty unless you are retirement age.
Borrowing against Retirement to Pay Debts
Also a bad idea, in most cases. Borrowing depletes your take-home pay. And, unlike a personal loan which you may decide to discharge in bankruptcy, you cannot “discharge” a retirement plan loan. It’s money you owe yourself, in a way. Your employer will generally not be able to allow you to skip payments, or even turn it into a distribution.
Your loan repayment deduction has to continue as long as you hold the same job. This can be a nightmare if your repayment amount is too large.
Downside of using retirement funds for debt
Taking money out of your retirement account triggers taxes and penalties. It permanently depletes your retirement. In order to build it back up, you will have to have more taken out of your check each time you are paid.
If you borrow against your retirement, you are stuck with that repayment until it is totally paid back. There’s nothing you can do to stop it. If any emergency comes up, you will be at a serious disadvantage.
Don’t take money out of your retirement if you are considering bankruptcy. While your money is safe and protected while it is in the retirement account, it becomes unprotected the minute you withdraw it. Retirement funds lose their protection once they hit your bank account. Creditors, and bankruptcy trustees can take the money, since now just money in your account.
When you’re thinking about how to deal with debts, using your retirement can be an option. But, since your retirement is totally protected in bankruptcy, think twice before using your retirement to pay debts. Especially, consider bankruptcy options, since your retirement is important for your future support.
If you would like a personal consultation to review how you can keep your retirement and avoid other mistakes, call West Law Office for a free consultation.
We offer in-office, video and telephone appointments.
We can do your entire case online.
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