People who are struggling with debt often consider taking some money out of their retirement accounts in order to keep creditors at bay. Debtors often believe they must do everything they can to pay their bills now, even at the cost of raiding their retirement funds.
To a degree, this is understandable, especially if creditors and collection agencies are putting pressure on you. But debtors in the San Antonio area and across the nation should know this: using retirement savings to pay off debt is a very risky plan of action.
This is, in part, because 401(k) funds are actually protected from creditors. So, taking money from your 401(k) to pay a debt that might end up being settled or written off down the line might not be beneficial at all; it might actually be detrimental.
When you file for Chapter 7 bankruptcy, the majority of your debts are generally wiped clean. And your 401(k) account will remain untouched. But if money from the 401(k) account has already been placed into your checking account in order to pay bills or living expenses, creditors may access this money.
The money is only completely safe if it remains in your 401(k) account.
A 401(k) is also considered a protected asset when one files for Chapter 13 bankruptcy protection.
So, because a 401(k) is one of your safest investments, it is generally wise to resist withdrawing money from it in order to pay off debts. Instead of draining your 401(k) or other retirement investments, it may make more sense to consider bankruptcy as a debt relief option. This could enable you to keep your retirement assets intact while your debt is discharged or decreased.
In short, it is important to understand all of your options before taking a major step such as taking funds out of retirement accounts.
Source: Fox Business, “Will my 401(k) be Safe if I File for Bankruptcy?” Justin Harelik, June 19, 2013