The best laid plans don’t always pan out. This old adage seems particularly true when it comes to planning a lifetime of financial health and security. Sometimes the economy has a way of pulling the rug out from under the feet of even the most stable individuals. In this situation, some consider cashing in on their retirement account/s to pay off debt in order to avoid bankruptcy.
Major issues to consider if you are facing a similar dilemma include:
- Would cashing in your retirement account provide enough funds to completely clear your debt? Or would you be cashing in on your retirement, using it all to pay some of the debt and eventually turning to bankruptcy anyway?
- Tax penalties (federal and state) apply when cashing in on your retirement account/s early.
- Would cashing in on your retirement account/s leave you in a difficult situation when the time comes to retire?
- Retirement funds are protected (exempt) from creditors when filing for bankruptcy.
If your retirement funds far exceed the cumulative debt you are wishing to discharge and cashing them in would not leave you in dire straits when the time comes to retire, it might work for you. But for most, it doesn’t make sense. Retirement funds are protected from the collection of debts during the bankruptcy process. They are completely exempt. An individual who has dedicated a significant portion of their income throughout a multitude of high income years might have far more in their retirement account than the cumulative debt they are going through bankruptcy to discharge. Some see it as an unfair exemption. But, regardless of any who oppose on a moral basis, it is the law. Retirement accounts can’t be touched by the creditors of individuals filing for bankruptcy. Inherited retirement accounts may not be protected. Consult with your bankruptcy attorney to get clarification on your specific situation prior to filing.
If you have questions regarding the protection of your retirement accounts during the bankruptcy process, call the Southern California bankruptcy law experts at Westgate Law.