Don't Give Your Retirement to Your Creditors

Retirement accounts are often a significant asset of individuals and families facing financial hardship following a job loss, major medical expense, divorce, or other occurrence. Tapping a retirement account is an enticing option when faced with not being able to pay bills. This option often only is a short-term fix, and can make things worse if bankruptcy is ultimately filed. Bankruptcy can protect retirement, but cannot un-spend a spent account.

Many retirement accounts offer the option to borrow money or withdraw early. Early withdrawals often come with stiff financial or tax penalties. For example, taking distributions from a traditional IRA before one is 59 1/2 results in a 10% penalty (unless an exception applies) and taxation of the distribution. Is the retirement money a permanent fix for the financial problem, or will it only serve as delay? Does it create new problems down the road? Before borrowing against your retirement (formally through a loan or informally with a withdrawal), evaluate yourself from the perspective of a lender. Do you have the ability or likelihood of developing the ability to pay the retirement back? If you are at a point in your life where you could never replace your retirement savings, you owe it to yourself to explore all options before you deplete those savings.

In bankruptcy, a number of exemptions or exclusions are available to protect most types of retirement accounts, including IRAs and 401(k) recognized by the IRS, state employee retirement, and various government pensions. When these apply, a debtor will not lose retirement savings in bankruptcy. Congress and the North Carolina legislature has recognized that retirement savings are a long-term endeavor, and should not have to be restarted when one has difficulties with debt.

If you are considering using your retirement savings to pay the mortgage, make a car payment, or pay credit cards, you are at a point where you should explore if bankruptcy protection may be a better option. You worked hard to save those retirement dollars, and you will need them when you retire. Bankruptcy may allow you to keep those retirement dollars while also providing permanent relief from the demands of your creditors.