When Considering Filing Bankruptcy Should I Use My Retirement Funds to Pay My Debts Instead?

        I heard it again from a prospective bankruptcy client that he cleaned out his retirement funds to pay his high medical bills despite having been just laid off from his job. He still has $40,000 in other debts and needs to file bankruptcy. When he comes in for his consultation next week I will have to tell him the disheartening news that he could have kept his retirement funds and included his medical bills in his Chapter 7 Bankruptcy. 401ks, 403bs, IRAs and similar retirement plans are all exempt assets which Debtors can keep and the bankruptcy trustee cannot seize these funds for the benefit of creditors. The laudable public policy decision behind this exemption is that debtors should not be stripped of their retirement savings when filing bankruptcy. If debtors were to lose their retirement savings by filing bankruptcy the whole idea of a fresh start would be defeated since they would be left with nothing to fall back on during their retirement years. So I cannot stress enough to anyone with debt problems please consult with a bankruptcy attorney before using retirement funds to pay debt. Not only may Chapter 7 Bankruptcy be the answer, but in addition to depleting your retirement funds by paying delinquent bills you will also incur the income tax liability for redeeming these funds prior to your retirement age.

Bankruptcy Allows You to Keep Your 401k and IRAs so Don't Liquidate to Pay Your Creditors

   The conversion of a 401k or ira to pay creditors can be avoided by filing Chapter 7 Bankruptcy. These types of retirement accounts are exempt assets and can be kept for their  future intended usage as retirement income. It is a mistake to convert an exempt asset like a 401k into a non-exempt asset by taking a 401k advance and deposit it into a personal bank account. The fact the funds can be traced back to the exempt 401k does not change the fact that they are no longer exempt. This mistake can be compounded by paying creditors with it if you could instead qualify for a discharge of your debts under Chapter 7 Bankruptcy. Also even if you do not pay creditors with these funds what may appear to be a logical decision to deposit these funds into a relative's bank account to avoid any bank executions from outstanding judgments is a problem since the asset is now now longer exempt and has been transferred to an insider which under the Bankruptcy Code the Chapter 7 trustees can treat as an avoidable transfer for two years prior to the bankruptcy filing. Even if these funds have been paid back to the debtor prior to filing that does not cure the fraudulent conveyance under the terms of the Code and the relative who was doing the debtor a favor is subject to suit by a bankruptcy trustee for the amount transferred.  Whenever faced with overwhelming debts before you liquidate your retirement accounts you should consult with a bankruptcy attorney to review your options to see if you can keep these accounts and discharge the debts with a bankruptcy filing.