Using Retirement Assets To Avoid Bankruptcy Is A Terrible Idea

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When you feel like financial chaos is upon you it is not the time to lose sight of the bigger picture and seek sound legal counsel.  While every case is different, and you should look at the short- and long-term effects of any major decision, and using retirement assets to avoid bankruptcy is not advised in most cases. When getting into debt problems it is easy to get lost in the scramble to keep obligations current. Juggling financial disaster usually results in much wasted effort and money without proper planning.  Many think it is their duty to do whatever they can to pay off their debts. Because of this, it may be tempting to look to your retirement accounts as a way to pay your credit card bills, stop a vehicle repossession or avoid foreclosure instead of considering bankruptcy. 

Although paying off bills at any cost may seem like a worthy goal, using your retirement assets in this manner usually proves to be a foolish and needless act of financial self-sacrifice.   In fact, in the long run it can make your long-term financial situation significantly weaker as opposed to filing bankruptcy.

There are several compelling reasons why tapping into your retirement assets is not advisable. First, Raiding your retirement account will usually cost you. If you withdraw money from these accounts, you will almost certainly get hit with immediate early withdrawal penalties. You are additionally likely to incur tax consequences. Second, withdrawing from your retirement assets will usually lose you substantial tax advantages on your money and deprive you of the beauty of compounded growth.  This means that you will lose a significant portion of your retirement assets before any bills has even been paid.

Another important reason to consider bankruptcy to deal with debt problems is that most retirement accounts are exempt in bankruptcy. This means that creditors are not allowed to reach the accounts to satisfy outstanding debts. Under the bankruptcy law, exempt retirement accounts include:

• 401(k)

• 403(b)

• Pension plans

• IRA (both Roth and Traditional are exempt up to a amount set forth in the law)

• Keogh plans

• Most defined benefit plans

Since these accounts are considered exempt in bankruptcy, it means you can keep the entire balance throughout the process. During bankruptcy, most of debts are either discharged or reorganized, depending on the type of bankruptcy. That means that once we complete your bankruptcy case, you emerge free from your debts and with your retirement assets intact.

Word of caution, although most retirement accounts are considered exempt, the exemption is not absolute. Transferring other assets into these accounts just prior to filing bankruptcy can cause these accounts to lose their exemption status. Many debtors have learned the hard way that trying to take advantage of this exemption by making these irregularities exist can result in, the court ordering the accounts opened to creditors.  As a general rule all transfers into the accounts, all of the debtors accounts, occurring months before the bankruptcy is filed are scrutinized and subject to review.

Consult with an Attorney

Simply put, there is rarely good reason to use the money that you have saved your entire career to pay off debts, after all its destined for your retirement.   Since retirement accounts are exempt a experienced attorney can counsel you to the option that makes the most sense and works in the short term and for the long haul.  Unfortunately, many people with good intentions make this mistake, which can significantly dim their retirement prospects. Call or text Torres Legal today at (973) 815-0075 to discuss your options and start to discover the relief that Bankruptcy can offer qualified debtors.