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| Image courtesy of Ambro / freedigitalphotos.net |
In an effort to avoid bankruptcy, many people who are falling on times of
financial distress will start tapping into their retirement savings to stay
afloat and attempt to ward off creditors.
However, this is one of the biggest mistakes you can make for several
reasons: first, that money is protected from creditors, even if you file
bankruptcy; second, it might be wasted payment since that particular debt could
potentially be discharged in a Chapter 7 bankruptcy (or reduced in a Chapter 13
bankruptcy).
Any money that you have saved for retirement or have placed
in a 401(k) program is exempt in a bankruptcy.
This means that these are funds your creditors cannot touch, even if you
qualify for a Chapter 7 and your assets are liquidated to pay off your
creditors. Federal bankruptcy laws
ensure that this money is protected so that you can (hopefully) avoid
bankruptcy in the future and have a solid foundation for rebuilding your life
and financial goals. So if this money is
protected from creditors, why would you willingly give it to them?
Another thing to keep in mind is that if you are tapping
into savings that you have put aside for your retirement, something is not
right with your budgeting and month-to-month living expenses. It might work to mend your situation temporarily
or get a creditor off of your back for the short-term, but how long can this
last? Even if you are able to use these
retirement funds as a temporary fix to your financial situation, what about the
long-term outlook? If you find that you
are not able to make ends meet, your first efforts should be in clearing away
some debt through bankruptcy (if necessary) and living within a more realistic
budget—not taking away from your savings for the future. These are the best steps to getting back on
track financially, and you can take them with your retirement savings
intact.
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