Is It Better to Use Retirement Funds to Pay Off Debt Prior to Filing Bankruptcy?

January 18th, 2013 by Reed Allmand

Retirement and bankruptcy

Retirement funds are commonly used to pay off debt when a person wants to avoid filing bankruptcy.  Yet, in some cases when you avoid filing it can put more strain on your finances.  It is understandable you want to take care of your financial obligations, but using retirement funds to pay off debt can be a mistake for several reasons.  Many tend to use the funds to pay off debt but their situation may not improve and file for protection anyway.

Using retirement funds to pay off debt is an option that needs to be reviewed carefully before funds are withdrawn.  Most people who decide to tap into their retirement account before reaching retirement age are subject to paying penalties and taxes for touching the funds early. If you decide to pull cash out you’ll need to make sure taxes and penalties are paid; meaning they should be taken out or set aside.  You may be responsible for paying taxes and penalties not paid when you borrow against the funds. If there is an outstanding amount of penalties or taxes due they may not qualify for discharge in bankruptcy. You may end up paying more than what you borrow if you are unable to repay the loan including interest.

Some decide to use retirement money to pay on debt they have settled with their creditor.  If you reach a settlement and pay less than the original amount owed you may receive a 1099 form to report details on your taxes.  For many this results in paying more taxes.  Yet, if you decide not to withdraw retirement funds they can be protected when you file bankruptcy.  This may help you save more in the long run while gaining control of your finances.  Review questions and concerns with a bankruptcy expert.




About Reed Allmand


Allmand's vision is rooted in his own financially precarious childhood in Abilene "My father always had difficulty holding a job and supporting our family, so after my parents divorced when I was 12, my sister and I got jobs to help make ends meet," he recalls. "I remember what it felt like as a child to worry that our car would be repossessed or home foreclosed on."

View all posts by Reed Allmand


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