As a general rule, it is unwise to borrow against or liquidate your retirement savings to pay your debts. The U.S. Bankruptcy Code does not require you to liquidate your retirement savings to pay your bills before, or after, you file for bankruptcy relief under Chapter 7 or Chapter 13. Most forms of retirement savings and pensions are protected in bankruptcy proceedings.
Many people facing insolvency do not understand this fact. They withdraw or borrow against their retirement, thinking their financial situation will soon improve. When it doesn't and their financial distress becomes intolerable, they finally seek the help of a bankruptcy attorney. It's usually at the first meeting with the bankruptcy lawyer that the debtors receive the unpleasant news that they did not have to liquidate their retirement savings.
Other fallout from liquidating retirement savings includes the penalties associated with early withdrawals, and the potential for additional income taxes on the amounts withdrawn.
There are some instances when it makes sense to tap into your retirement account to pay your debts, but they are few and far between.
For most of us, the use of retirement funds to pay our debts is a mistake we will regret throughout our golden years, and should be avoided.
Matthew S. Rousseau, Esq.
Morrison Rousseau, LLP
www.WorcesterBankruptcyAttorney.com
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