It is a common occurrence for people to come to me for a bankruptcy consultation after having cashed out their entire retirement savings in order to pay bills, only to find that a bankruptcy is necessary anyway. Hindsight is 20/20, as they say. Most of those in that position wish they had left their retirement funds in tact and filed for bankruptcy earlier on.

It’s not to say that using retirement savings to pay off debt is always a bad decision, but many times it is a futile attempt. Not to mention there are heavy tax consequences for doing so in most cases.

There are penalties for early withdrawal of the funds in the retirement plan, and if the debt which is being paid is settled for less than full, the amount written off may be considered taxable income to the person paying.

It is important to understand that retirement plans, whether pension, IRA, 401(k), or other like plan, are 100 percent protected from being taken in a bankruptcy.

Because of that protection, it makes sense to evaluate all options with regard to dealing with debt before taking action. It is possible that the benefit of the bankruptcy discharge, plus keeping savings in tact outweighs the detriment to the credit score.

In order to make that evaluation, I recommend consulting with an experienced bankruptcy attorney, financial planner, or accountant. Becoming informed about your options before making a decision on such an important topic is the only way you will not suffer the “I wish I had” syndrome.

• Denise K. Aguilar is an Ahwatukee attorney whose bankruptcy practice focuses on consumer and small business bankruptcy. Reached her at (480) 455-1881 or visit

(2) comments

Kate Smith

Your thoughts are very wise, as always. I think before making such a decision it's worth to think very well, withdrawing from retirement can not be taken lightly. There are some occasions when it's can really help and can be considered as an option, but sometimes it's a wrong step. No need to hurry to use the money which are intended to provide old years and are protected from bankrupcy. Paying off the debt with another debt isn't a good dea, but if there's a need to make an urgent payment, then taking out no fax payday loans can be considered. There are also other options, but it's not worth to try pay off every debt with retirement savings.


A nice argument with interesting observations. I completely second you in saying that paying off all your debt using the retirement plans is not a very bad decision, but the only problem is it doesn't seem to feasible always. As an alternative financial option one can consider finding the Right fast cash loan Lender.

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