Should I Use My Retirement Savings Instead of Filing for Bankruptcy to Pay Off Debt?

If you’re facing what seems like insurmountable debt, you may be wondering if you can use your retirement savings instead of filing for bankruptcy.

The straight answer is yes. But the more important question is whether you should. This is a quandary better handled by skilled bankruptcy attorneys.

Because although it may sound scary, declaring bankruptcy could be a highly effective way to manage debts while preserving important assets such as your retirement accounts.

Specific Kinds of Debt You May Be Facing

It’s tough enough to manage a single source of debt. But when your debt has multiple sources, it’s easy to miss payments or only make minimum payments because you’re dealing with different interest rates and payment terms. Soon enough, you’re struggling with high interest rates that keep you trapped in the cycle of paying off only interest rather than the principal. It’s difficult to dig yourself out of this hole.

There are many kinds of debt you may have.  Here are some examples:

Car Loan Debt

With a car loan, you work to pay back (with interest, of course) a lump sum of money over time. Interest rates tend to be lower for this sort of loan, but if you fail to pay it back within a time frame of usually 3-6 years, your car can be repossessed.

Credit Card Debt

One of the most common types of debt is the credit card variety. With this debt, you can borrow up to a maximum limit repeatedly. Credit cards are easy to use and give you the illusion of having endless funds. Plus, they often have a low introductory interest rate which skyrockets after a given amount of time.

Mortgage Loan Debt

Even more common than credit card debt in the United States is mortgage debt. People take out mortgage loans to buy a home or other property. They’re most commonly issued in 15- or 30-year terms and have one of the lowest interest rates of any consumer loan product.

Other Kinds of Debt

There are, of course, any number of other forms of debt. These include personal loans, medical debt, and lines of credit – to name just a few. Each has different rules for payment and interest rates vary from one situation to another.

Whatever your source(s), facing oppressive debt is exhausting. And if you have a decent chunk of change in your retirement account(s), you’ve probably pondered using those funds to pay off those debts to get a fresh start. Which brings us to the big question:

Should I Use My Retirement Savings Rather Than File for Bankruptcy?

Appealing as this “quick fix” might seem, you must strongly consider this decision. Addressing financial challenges now with funds set aside for the future could have serious long-term consequences.

The most obvious reason to avoid this path is that retirement savings are intended to provide financial cushioning in your later years. If you take them out now and can’t recoup them, it could result in insufficient funds to cover essential living expenses that come with aging and retirement.

Furthermore, withdrawing funds from your retirement account(s), especially before the age of 60, could be subject to income tax. You may also be charged a withdrawal penalty; all of which could reduce the amount you actually receive to pay off those debts.

But here’s the most important point to consider. Retirement accounts are often protected in bankruptcy proceedings in Michigan, regardless of whether you file for Chapter 7 or Chapter 13 bankruptcy.

If you file for Chapter 7 bankruptcy, your non-exempt assets are typically liquidated to pay off creditors. Many assets, however, are exempt (i.e. protected) and retirement accounts happen to fall into this column.

Chapter 13 involves creating a manageable repayment plan to settle debts over a typical period of three to five years. It doesn’t require liquidation of assets. Therefore, your retirement accounts are similarly  spared in this process.

Don’t Be Afraid of Filing for Bankruptcy to Get a Fresh Start

Questioning whether you should use retirement savings instead of filing for bankruptcy is totally normal. The idea of bankruptcy can be unsettling for many people.

Even though bankruptcy can impact your credit score, the potential financial hardship you may face from withdrawing from your retirement accounts to pay off debt; along with the inability to make necessary payments later is not the recipe for keeping your credit score safe. So, if you’re considering starting the filing process, contact the bankruptcy lawyers at Gold, Lange, Majoros, & Smalarz. Our goal is to help you get the fresh start you deserve without sacrificing your future!