August 22, 2013 /24-7PressRelease/
-- Many people take advantage of incentives that the federal government and employers offer to encourage people to save for retirement. When people experience financial hardship, they may be tempted to try to use the funds they have saved for retirement to regain their financial footing. However, people should understand how bankruptcy law treats retirement savings accounts and why filing bankruptcy may be a better way to deal with debt than using retirement funds to pay down debt.
In order to encourage people to save for retirement and not depend on Social Security as their only source of income after retirement, Congress allows people to have some tax advantages for depositing money into certain types of retirement accounts
. The law also protects funds in those accounts from creditors, including creditors trying to get money from a person who has filed bankruptcy.
In order to qualify for protection, a retirement account must meet ERISA standards. In general, 401k accounts are fully protected from creditors during bankruptcy. An IRA is protected during bankruptcy up to $1 million.
Borrowing from retirement accounts
Some people make errors dealing with their retirement accounts when they are having financial difficulties. Some people make the mistake of withdrawing money from their retirement accounts to try to pay off debts. However, in so doing they are creating more issues for themselves in the future. If people are not able to repay the loans that they take from their retirement accounts, not only do they have to pay income taxes on the amounts they withdrew, they also have to pay early withdrawal penalties. They may be spending their retirement savings on debts that they could eliminate in bankruptcy, as well.
Others who know that their retirement funds are protected may not understand that the money loses the protection once they withdraw the money from their retirement accounts. If a person absolutely must take a loan from a retirement account, such as when a person unexpectedly loses a job
and needs funds in a 401k to pay monthly expenses, the funds are automatically eligible for creditors to seize once a person transfers the money out of the retirement account and into another bank account.
Speak with an attorney
Before emptying a retirement account to try to pay off overwhelming debts, a person may want to consider filing bankruptcy. People can eliminate many unsecured debts such as credit card bills and medical debts while protecting retirement funds. If you are struggling financially and feel like you have no option except to use retirement funds as a means of getting out from underneath crushing debts, speak with an experienced bankruptcy attorney who can educate you about your debt relief options.
Article provided by Marrs & Terry, PLLC
Visit us at www.marrsterry.net