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How will I stay afloat in retirement?

You are struggling under the weight of debts and considering bankruptcy as one way to start anew. However, the prospect of starting from scratch scares you because, while it seems to solve your debt problem in the short term, what about the long-term picture? For example, how well can you stay afloat in retirement if you have to use your retirement funds to pay off creditors in a bankruptcy?

The answer is good news. Your retirement accounts should be safe. The bankruptcy generally does not touch these.

One sort-of exception

This exception is not really an exception per se but is worth discussing. Suppose that you have already withdrawn, say, $30,000 from your 401(k) account to pay down bills. Can you then take that $30,000 off the table for a bankruptcy filing?

Since it is now money that is in your checking or savings account, you may lose some or most or even all of it in bankruptcy (assuming what you owe is greater than $30,000). Also, if the bank you keep your accounts with is also where you received financing for a still-unpaid car or house, your bankruptcy filing could trigger a default alert. The bank then might be able to freeze your accounts and use some of your money to pay what you owe.

You are generally safe

As long as you do not touch the funds in your retirement accounts, they should be protected for you to use when you do retire years later. So, if you are debating whether to pull some out now to pay down bills and cut down on creditor harassment, it can be a good idea to chat with a lawyer before doing so. Remember that when funds have years or decades to accumulate and to build interest, the savings can be powerful. By withdrawing money, you diminish much of what could be possible. After all, there is a reason that retirement accounts are typically safe in bankruptcy.

 

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