How You Can Lose Retirement in Bankruptcy

These are the main ways people lose their retirement in bankruptcy. There are others.

A common mistake made is to use a retirement plan withdrawal, like a hardship withdrawal, to pay down a debt, like a car payment, to help with the budget. Depending on your circumstances, this may be okay. But often, I see people pay off large debts, like cars or recreational vehicles, and this creates other problems.

For example, if you have a $20,000 car and owe $20,000 on it, you might have a payment of $600 per month. Your budget sure could use an extra $600 per month.

If you had that extra money, you could make your minimum payments and avoid bankruptcy. So you take a withdrawal from your retirement fund. Do not do this, or you may lose your retirement in bankruptcy.

Later, you find you really need to file bankruptcy. You learn that the $20,000 you HAD in your retirement account (which you used to pay off the car) has created a different problem.

The equity you created by eliminating the car loan now keeps you from being able to file a Chapter 7, and means you will pay more in a Chapter 13.

You would be better to reverse this, take a loan out on the car, put the money into a private retirement as much as possible, and then file for bankruptcy. This way, you don’t lose retirement in bankruptcy, or lose as much.

In this example, the retirement plan was not lost in bankruptcy, but it created a problem, a different kind of loss.

There are other ways to lose your retirement in bankruptcy. But, since your retirement is totally protected in bankruptcy, you ought to consult with a bankruptcy specialist before actually taking that loan or withdrawal from your retirement account.

Bankruptcy is often a better option than using your retirement account to deal with debt.