When financial trouble hits, consumers will do almost anything to make ends meet. Cashing out retirement accounts is common if a family falls behind on bills. I’ve seen this strategy being used time and time again as a bankruptcy lawyer serving Western North Carolina. It makes sense for consumers to consider all of their alternatives, including using retirement savings. Usually, however, cashing out retirement accounts is a bad idea because they are exempt from creditor collection. This means that creditors cannot gain access to a consumer’s retirement accounts for payment on a debt unless the consumer voluntarily cashes out the retirement account first.
Moreover, cashing out retirement accounts is expensive. Read a summary of the rules regarding retirement account withdrawal penalties here. Many of my clients have already fallen victim to the early withdrawal penalties before they see me, and have a general sense that they are paying a high price for an early withdrawal. Understanding the rules for mandatory distributions is also important in putting together a complete financial recovery plan. Taking out retirement funds before turning 59 1/2 years of age is expensive, and so is failing to take mandatory distributions after age 70.
Once a client understands how much they will pay to use their retirement accounts, we can then look at the costs of other available alternatives. Retirement funds can generally be protected in a bankruptcy filing, and are frequently a critical building block of a permanent solution for debt problems. If you would like to understand your best financial options moving forward, I would be pleased to speak with you during a free, initial bankruptcy consultation.
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