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Even in Chapter 7 Bankruptcy, Your Retirement Funds are Safe

February 13, 2015

Michigan Chapter 7 Lawyer Recommends Saying “No” to the Temptation to Withdraw Funds Early

The investment gurus on TV, radio and the internet all advise you to take full advantage of employee retirement accounts that receive employer matching contributions. This is great advice, but when you see your retirement balances build up, it can be tempting to grab those funds to pay your bills when times get rough.

If you talk with Jeffrey Randa before cashing in your retirement accounts, he can stop you from making a huge mistake. As an experienced bankruptcy lawyer, he knows that most retirement savings cannot be taken by your creditors. If you file for Chapter 7 bankruptcy, the funds can be protected.

Most Retirement Funds are Protected From Chapter 7 Bankruptcy Liquidation

Bankruptcy cannot generally make you cash-in your retirement savings to pay outstanding debt. Even if you have thousands of dollars in retirement plans, these funds are likely to be out of reach from your creditors, as long as they are in “qualified” plans, such as IRA or 401(k) accounts.

When you bring your financial information to Jeff, he can tell you how much of your retirement savings you can keep after Chapter 7 bankruptcy. There is a good chance that all funds will be safe and those funds will be waiting for you once your bankruptcy is complete.

Reasons Why it Makes Sense to Hold on to Your Retirement Savings

If you managed to save a significant amount of money in a retirement account, you may feel it is like found money that you can use to avoid bankruptcy and pay your bills. Here are three reasons why it makes sense to hold on to those funds:

  • It is not necessary. If you qualify for Chapter 7 bankruptcy, you can eliminate much of your debt without liquidating exempt assets, and most retirement savings qualify as exempt assets under the bankruptcy code. Why should you completely empty your pockets to eliminate debt that can be eliminated through Chapter 7?
  • You lose money. Once you put money into a qualified plan, you cannot withdraw it without major financial consequences. Whenever you use pre-tax dollars to fund an account, you pay income taxes on them at current tax levels. Additionally, if you withdraw funds before you reach age 59-1/2, you also pay a ten percent penalty. In other words, even at the lowest tax rate, a withdrawal of $1,000 may only put $800 in your pocket. You spend $200 and have nothing to show for it.
  • You retain the funds for emergencies after bankruptcy. Even after bankruptcy, emergencies can still happen. The qualified retirement account rules actually permit penalty-free early withdrawals for certain reasons. So, after bankruptcy, if you need the money to pay college expenses, certain medical expenses, disability costs or even make a down-payment for a first-time home purchase, your retirement funds can put you closer to your goals.

Seek Knowledgeable Legal Support Before Cashing in Retirement Accounts

Bankruptcy laws can be complicated, but they are second nature to Jeff. At the Law Office of Jeffrey J. Randa, we know the current laws. To avoid costly errors, it makes sense to seek our advice as soon as you notice signs of financial challenges. Call us today at 586-228-6523 for a free phone consultation, or use our convenient contact form.

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