Once in a while, I hear from debtors who tells me that they expended all or nearly all of their retirement savings trying to avoid bankruptcy. Unfortunately, if you spend your retirement funds trying to avoid bankruptcy, you cannot get it back. If, ultimately, the use of those retirement funds was insufficient to avoid bankruptcy, that money was simply wasted if the debtor still needs to file either Chapter 7 or Chapter 13 bankruptcy.
As I have written previously, 401(k) and most other retirement plans are exempt in bankruptcy. What that means is that if the debtor engaged in some bankruptcy planning and filed bankruptcy before withdrawing retirement funds, the debtor would be able to keep those retirement funds and discharge his or her debts.
I understand why debtors spend their retirement money on debts that would otherwise be dischargeable in bankruptcy. Usually, they want to repay their debts and they will employ any available means to do so. While most debtors are aware of bankruptcy as an option, most debtors try to avoid it.
Since bankruptcy gives you a chance to discharge your debt and protect the assets such as retirement funds, it may be foolish to spend all of your retirement money, and I advise debtors to explore their options before making these decisions. The most important question that the debtors should ask and answer is whether their necessary and reasonable living expenses and debt payments exceed their take home income on a regular basis. If so, is this going to change because of increased income or decreased expenses in the foreseeable future?
If the debtor is left with a permanent deficit and does not expect it to change, then it does not make sense to withdraw retirement funds to continue to pay down that deficit until there is no retirement money left. The bankruptcy system, both New York and federal exemptions, protects your retirement funds.
If you are contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, New York, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.