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Bankruptcy or Retirement?

If you are someone who has experienced a difficult financial phase, chances are you’ve considered a variety of options to ease the burden. One of the most common solutions people have for resolving their financial challenges is to take money they’ve saved and use it to pay off debt.

Sometimes this is the best solution, but what about when that savings is intended to fund your retirement? Should you ever use retirement savings to avoid bankruptcy?

Many financial experts recommend using retirement savings to pay off debt, especially if you are still a few decades or more away from retirement. And conversely, most bankruptcy experts will tell you that using protected funds, including retirement savings accounts like 401Ks, pensions, and IRAs is a bad idea. It’s impossible to know exactly what you should do without speaking to someone who can assess your circumstances and help you make the best decision about your case.

Retirement Savings Accounts are Not Like Other Savings Accounts

Despite every case being different, it’s important to view your retirement savings differently than other money you’ve earned. You’ve worked hard to gradually build your retirement nest egg and using that because you are facing dire circumstances can leave you worse off than if you chose a different option.

It’s also important to realize that the way things are now won’t likely be how they are in the future. The cost of living is going to continue to rise and you’re going to need every penny you’ve saved thus far to pay for your life once you have retired.

By pulling from this savings, you are sacrificing the benefits of compound interest. Essentially, the more you save the more you earn on that savings, which means using some of it is going to jeopardize what you’ll eventually have no matter how hard you work to rebuild it.

“But If I’ve Got the Money…”

Too many people assume that their creditors are entitled to all of the money they have when they owe a debt. And some even believe that once you file for bankruptcy you’ll need to use that money to pay them anyway, so why not take control if it helps you avoid bankruptcy?

The truth is there are laws allowing you to exempt certain assets in bankruptcy, including your retirement and pension savings. Filing for bankruptcy does not mean you will be forced to pay creditors your retirement savings money, nor will you be forced to give up many other assets, including your home or vehicle. Each case is different, but most experienced bankruptcy attorneys are able to help you protect your most valuable assets in bankruptcy.

Finally, you need to realize there will be financial penalties to using your retirement savings to pay off debts. Retirement savings money is not taxed until it is pulled from the retirement account. This means you or your employer places the money directly into the savings account without first taking taxes from it, but when you begin using that money you will be taxed. This is something financial counselors help retirees plan for because the tax consequences can be significant.

The last thing you need is to pull a chunk from your retirement savings to resolve a financial crisis, only to learn you’ve created a new one with the IRS and you owe the government thousands of dollars.

There are also penalty charges if you withdraw the money early, resulting in the loss of even more of your hard-earned dollars.

The TaxDefenseNetwork.com shares important things you should know about pulling money out of your retirement early. At the very least, make sure you understand what it is you are getting into before using retirement funds to pay off debt.

Speaking to a Bankruptcy Attorney Helps You Avoid Financial Consequences Related to Your Retirement

The best thing you can do if you are facing a serious financial crisis is to speak to a bankruptcy attorney and find out what your options might be. This doesn’t obligate you to file for bankruptcy, but it’s a smart to have someone assess your situation and help you make the best decision possible.

For more information or to speak to someone about the best way to handle your financial challenges, contact the Law Offices of Robert M. Geller at 813.254.5696.

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At the Tampa Bay law firm, the Law Offices of Robert M. Geller, P.A., we help people with consumer bankruptcy matters in the Tampa Bay-St. Petersburg,  Florida communities such as Clearwater, St. Petersburg, Thonotosassa, Riverview, Lutz, Plant City, Brandon, Carrollwood, Wesley Chapel, St. Petersburg Beach, Lakeland, Mulberry, Dade City, Pinellas Park, Largo, Seminole, Odessa, Oldsmar and Lithia, and counties such as Hillsborough County, Pinellas County, Pasco County, Polk County and Manatee County.