Many of the issues I write about on this blog are a bit of a grey area. This blog posing is an exception. There is nothing I hate more than meeting a client who needs to file Chapter 7 or Chapter 13 bankruptcy and finding out that they have cashed out all of their retirement in order to pay their creditors and STILL need to file bankruptcy. Unfortunately, I see this often. So, I have written about this topic before and I will write about it again in an effort to keep people from using their retirement to pay creditors.
The reasons that you should avoid cashing out retirement accounts to pay creditors are numerous. The most obvious reason, in my opinion, is that some day you are going to be old. You are going to be tired. You are going to want to enjoy yourself. You are not going to want to work at Walmart or Meijer as a greeter. You are going to need money to live in your elderly years and this is especially important considering that social security may or may not be around at that time. You cannot take out a loan for your retirement.
Another major reason that it doesn’t make sense to use your retirement to pay creditors is that, in Indiana, your creditors cannot attach or garnish your 401k, Roth IRA, IRA, cash value in some life insurance policies (this depends on how long ago you purchased the policy and who you have listed as beneficiary), and potentially other investment accounts you have depending on whether they qualify under the Indiana Code. As a result of this fact alone, it doesn’t make sense to take from yourself, from your own retirement, in order to pay creditors. But in addition to the fact that creditors cannot get to money held in a retirement account in Indiana, you may put yourself more in debt by taking out a retirement distribution. This is true because, depending on your age, there may be a penalty associated with taking a distribution from your retirement. Additionally, if you are taking money from a traditional IRA or 401k then you are also going to have to pay income tax on that money. Unless you ask that the required tax be withheld from your distribution you will likely be hit with a tax bill for the next tax year. So, wouldn’t your money be better off in your retirement account where it can continue to grow rather than you taking it out and possibly paying a penalty and income tax on that money in order to pay a debt?
I know that many people are afraid when they are not able to pay a debt. They are afraid of what can be done by a creditor and often taking a 401k loan or retirement distribution looks like a quick and easy way to put a problem behind them. But isn’t there another way? And that other way may not include bankruptcy. Isn’t it possible for you to cut a few things here and there out of your monthly budget such as cable, eating out, internet, salon treatments, or children’s activities until you are able to pay off the bill? Wouldn’t it be better to sacrifice now and set up a payment arrangement with that creditor in order to get the bill paid off in time rather than sacrifice your future?
And I know for some that there is no way that even if you cut your expenses down to the bone that you could even skim the surface of paying down your creditor(s). That time is the time to speak with a bankruptcy attorney regarding whether you are a good candidate for bankruptcy. I understand that no one wants to file bankruptcy. I understand that it is an emotional thing to realize that you should even speak with a bankruptcy attorney. Bankruptcy is not for everyone. But, for those who are considering cashing out a big chunk of their own retirement I think they owe it to themselves to explore the possibility. Through Chapter 7 bankruptcy it may be possible for you to wipe out all of your debt and keep all of your retirement. Wouldn’t your future self want you to at least consider this option?
If you find yourself reading this post thinking that you should speak with a bankruptcy attorney and you live in the Indianapolis area feel free to give me a call at (317) 575-8222. Every situation is different. I can evaluate your situation in a free, one hour consultation at Halcomb Singler located in Carmel, answer your questions, and let you know whether bankruptcy can help in your situation.
Halcomb Singler, LLP, is a debt relief agency. It helps people file for bankruptcy under the bankruptcy code. No attorney-client relationship with the firm of Halcomb Singler, LLP, is created through this blog. Also, please note that Erika Singler is an attorney licensed in Indiana and does not seek to practice law in any jurisdiction in which they are not properly authorized to do so. The information contained in this blog is general in nature and should not be relied upon for the circumstances of any individual(s) or businesses