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Should I Take Money Out Of My Retirement Account to Pay My Creditors?

Posted on Jun 11, 2014 in Bankruptcy, Chapter 7

The answer, as always, is “It depends”.  Take two recent examples we’ve seen.

The first person is a woman in her mid-40s.  She’s placed about $30,000 into her company’s 401K plan over the last 10 years.  Because she’s recently divorced, she’s struggled with bills and is short a few hundred dollars every month.  She’s relied on credit cards to keep her afloat and creditors are now demanding payment.  She owes about $15,000 in medical and credit card bills, a $1000 payday loan, and has a $400 per month car loan.

The second is a married couple who together earn $65,000.  They have two kids and one is about to enter college.  They have nearly $100,000 in credit card debts because of a nasty accident and a failed small business.  The husband has $20,000 in his company’s 403(b) plan and his wife has $40,000 in her 401k and $2,000 in a small IRA.

Every case is different, but when we first meet with these folks, we mention a few things:
1.  ERISA qualified retirement accounts (401K plans, 403(b) plans, similar accounts) are exempt from creditors.  That means judgment creditors can’t touch it and your bankruptcy trustee can’t make you liquidate your retirement to get a discharge in bankruptcy.
2.  Figure how much you take home now, then deduct the cost of a loan repayment (or two, or three) to determine what you’d live off of.
3.  IRAs may be entirely exempt depending on when they were opened and how much was recently funded.
4.  Calculate how long it took to build up the retirement plan and how long it would take to start over or pay off a loan – remember, you won’t be working forever.

In both cases, the debtors described may be eligible for a Chapter 7 bankruptcy filing, in which they’d eliminate the debt as well as keep the retirement accounts.  Bankruptcy is never something anyone’s thrilled to do, but it protects your future and allows you a chance for a fresh start, instead of borrowing from one place to pay another.

Before pulling money from a retirement account, call us at Lakelaw to set up a free consultation and discuss what the best way to handle your debt is for you and your family.



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