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 www.aguilarlawonline.com.