When individuals are faced with crushing debt, and unable to meet their monthly obligations, one of the logical questions they struggle with is whether they should use their retirement funds to pay the debt. There are few things about my job that break my heart more than hearing clients that are at, or close to, retirement age have used their retirement funds to pay their debt.
If I am hearing about it, that means that the funds were not enough and they are still looking at filing bankruptcy anyway. I am writing this blog in hopes of preventing others in similar situations from making the decision to use their retirement funds before contacting a bankruptcy attorney for a consultation.
Talk to a Bankruptcy Attorney FIRST!
It is important to note that every situation is different, and while it might make zero sense for one person to pay creditors with their retirement funds, in some other cases, it may actually be the preferable option. It is not just a black and white, simple yes or no, in every case, It is important to discuss your options with a bankruptcy attorney prior to making any decisions.
Retirement Funds Are Likely Exempt from Collection
In the overwhelming majority of cases, retirement accounts are exempt (or protected) from the creditors’ collection efforts. Under both the Minnesota State Statutes and the Federal Bankruptcy Code, there are protections for IRAs, pensions, 401Ks, and other qualified retirement accounts.
There are a few exceptions to these protections based on recent case law, but even in a lot of those cases there are other ways to deal with the debt rather than using the actual retirement funds to pay the creditors.
Using Retirement Funds Will Likely Result in Tax Consequences
Using your retirement funds to pay creditors in a Minnesota bankruptcy can be accompanied by several different forms of tax consequences. First, if the retirement funds consist of pre-taxed income, there will be income tax associated with the withdrawal—depending on your tax bracket this could create quite a problem at tax time.
Second, along with the income tax on the withdrawal, depending on your age, or other qualifying factors, the withdrawal could also be accompanied by tax penalties. Lastly, if the retirement funds are used to settle with creditors (or any funds really), the amount of debt that was settled becomes taxable income as well.
CALL NOW FOR A FREE STRATEGY SESSION FROM A MN BANKRUPTCY LAWYER AT KAIN & SCOTT
If you find yourself in the difficult position of considering whether you should use retirement funds to pay your creditors, before you make any decisions, please reach out to Minnesota’s NICEST bankruptcy law firm to set up a free consultation at www.kainscott.com, or give us a call at 612-843-0529. You will be glad you did!
