In “Can Creditors Take My Retirement Funds ? (Part One)” I discussed the protection offered under both state and federal law for retirement assets such as pensions, 401(k)s, and IRAs.  As I noted in that post, retirement assets are–almost always–fully protected from the reach of creditors and the bankruptcy trustee.

What does this mean to you?

First and most obviously, it means you can stop worrying about creditors or a bankruptcy trustee seizing your hard-earned retirement assets.  However, it means much more to your financial situation. Let’s take a client of mine–we’ll call her Mary, which is not her real name–for an example.

Mary was a realtor.  She had clients all over the Charleston area, from Mt. Pleasant to Summerville.  During the hot real estate market she did very well for herself.  She was by no means rich, but she lived a comfortable life.

As with many Realtors, she unfortunately suffered after the real estate market declined.  She had some credit card debt and two mortgages on her home.  As her income stream dried up, she began using her IRA to service her debts.  Mary, like virtually all of my bankruptcy clients, was a hard-working, productive member of society who’d always been able to pay her debts.  The last thing she wanted to do was file bankruptcy, and she did everything she could do to avoid it.

What’s the problem with avoiding bankruptcy?

I can hear some of you say, “Why shouldn’t she do everything she can to avoid bankruptcy?”  The answer is that she should try to avoid bankruptcy.  But sometimes bankruptcy is inevitable.  Mary’s problem was that she had sizable debt, and there was really no way she could avoid filing bankruptcy.  Consequently, she continued to use up her IRA paying mortgage payments and paying her other debts.

She met with me at one point during her financial crisis.  After reviewing her situation carefully, my advice to her was to file a Chapter 7 bankruptcy.  Rather than filing at that time, Mary continued to use her IRA to pay debt–debt that would eventually be discharged in bankruptcy several months later when she eventually decided to accept my advice.

On one hand I admire Mary for doing absolutely everything she could possibly do to avoid bankruptcy.  Almost anytime a client wants to “try a little harder,” I encourage them to do so.  But the answer to almost any bankruptcy question is: “It depends.”  Trying harder for a few more months is a great idea most of the time.  But it depends on each client’s unique situation.

The key is to determine whether there’s really any meaningful chance of avoiding bankruptcy.  If there’s not, don’t use protected assets like your  retirement asset to continue to pay your debts.  If bankruptcy is inevitable, those debts will eventually be dealt with in the bankruptcy, whether it’s a Chapter 7 case or a Chapter 13 case.

You only get one chance to save for retirement.  And there’s a reason both the state and federal governement have removed retirement assets from the reach of creditors.  Public policy is to protect those assets so that people will have them when they really need them.   No one can work forever, so we’ll all need something for retirement.

Does this mean I should never tap into retirement assets to pay debts?

Never is a strong word.  I’d say “almost never.”  I’d also say that if you are even thinking about tapping into your retirement funds to pay debts, you should consult with a bankruptcy attorney to explore your options.   I’d put this in the category of financial warning signs that often signal the need to file bankruptcy.

So if you need help, ask.  Get some good advice before you use hard-earned retirement assets to pay debts you may eventually discharge in your bankruptcy.

Related posts:

1. Can Creditors Take My Retirement Funds? (Part One)
2. Bankruptcy for Senior Citizens: Older Clients Have Unique Needs
3. Bankruptcy Experiences #1