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Paying Off Debts with Retirement Funds Is a Bad Strategy


Responsible, hardworking people can unexpectedly find themselves under crushing debt. An unexpected medical bill or a layoff can turn their world upside down. Not one to shirk responsibilities, they might be tempted to make withdrawals from their retirement accounts to satisfy the creditors that continue to call.

If you find yourself in this position, raiding your retirement funds to pay off or pay down on your debts is a bad strategy. Erasing or restructuring your debt, while keeping your retirement account intact, are just a few of the benefits of filing for bankruptcy.

Retirement Funds Are Protected

One bankruptcy myth is that you must use all available assets to pay as much of your existing debt as possible. Fortunately, bankruptcy laws safeguard many retirement accounts to help keep you from becoming dependent on public assistance in your later years.

The types of funds protected include the following:

  • 401(k)
  • IRA
  • 403(b)
  • Profit-Sharing Plans
  • Defined-Benefit Plans

More than $1 million is protected from creditors. The amount changes every three years with adjustments for inflation. The next adjustment is in 2022.

Emptying Retirement Accounts Robs from Your Future

If you have been saving money in preparation for your future retirement, congratulations. Keeping yourself solvent in retirement is crucial, and you only have so many working years to save for it. If you empty your accounts now to pay on a debt, you are increasing the likelihood of relying on Social Security for your ongoing living expenses. Social Security alone will not be enough.

Other consequences to consider if you withdraw from your retirement accounts:

  • Early withdrawal fees (usually 10%)
  • Tax penalties (varies depending on your age)
  • Income tax obligations
  • Loss of company matches
  • Loss of future interest

As a lawyer concentrating on bankruptcy and debt for more than a decade, I can offer seasoned legal advice based on your specific circumstances.

Bankruptcy Provides a Fresh Start

When looking across the country, most personal bankruptcies (69%) are filed under Chapter 7. That doesn’t appear to be true in North Carolina. According to the American Bankruptcy Institute, more North Carolina personal bankruptcies (53%) are filed under Chapter 13. Other states joining the Tarheel State with more Chapter 13 bankruptcies include Alabama, Georgia, Louisiana, South Carolina, Tennessee.

An estimated 6,400 personal bankruptcies were filed in North Carolina in 2021. There have been about 400,000 bankruptcies nationwide.

An overview of the two personal bankruptcy chapters is below:

  • Chapter 7: Chapter 7 is known as liquidation bankruptcy because it erases most of your unsecured debt. You won’t necessarily have to sell all of your assets to pay off your debt in a Chapter 7 bankruptcy. If you have equity in a home, you can protect up to $60,000 if you are 65 or older, and $35,000 if you are under 65. If you purchased your home while you were married then you may be able to protect even more equity in your home. In addition, you can exempt some personal property like clothing, furniture, electronics, and more. Up to $3,500 in equity in your vehicle is also protected. Other exemptions may apply. In the majority of Chapter 7 cases, there is nothing for the bankruptcy trustee to sell. This means that most people who file Chapter 7 bankruptcy are able to keep everything they own. Eligible debt includes credit cards, utilities, medical bills, back rent, attorney fees, and unsecured personal loans. Debt is usually discharged in three months. Chapter 7 bankruptcy offers relief to thousands of people each year but it is essential to have an experienced attorney to help you navigate through the process.
  • Chapter 13: Chapter 13 is a reorganization. Chapter 13 bankruptcy helps many people bring mortgage payments current, save vehicles, pay back child support or alimony, pay taxes, and for people who do not qualify for Chapter 7. Chapter 13 offers another avenue to regain your personal financial footing. Instead of erasing debt, Chapter 13 restructures the debt into a repayment plan over three to five years. In Chapter 13, some people pay their creditors pennies on the dollar. That’s right! Although it is a repayment plan, most people do not pay their creditors in full. As your attorney, I can create a repayment plan to include provisions for the creditors to accept less than what is owed. Certain debts must be paid in full: child support, alimony, and most tax obligations. A bankruptcy court must approve of the plan. You can keep all your property if you can afford to do so. At the end of the repayment period, the remaining balance will be forgiven if you have made all the required payments and are current on any child support or alimony obligations.

All bankruptcy proceedings will halt creditor calls, bills, and lawsuits. The automatic stay will also stop a foreclosure proceeding and gives many people the opportunity to save their homes.

Review All Options to Regain Financial Footing

At the Law Office of Kimberly A. Sheek, I focus only on bankruptcy. I refer to myself as a one trick pony. I believe that bankruptcy does not define a person. Bankruptcy helps thousands of people each year get back on track so they can get the fresh start they deserve and so they can focus on their future. No matter your socioeconomic position, I will treat you with integrity and respect. I will put the full force of my experience to guide you through your bankruptcy case and other debt-relief options.

If debt is controlling your life, it’s time to take back the reins. I can formulate a viable plan that addresses your financial concerns so you can focus on the things that matter in your life whether it be family, friends, your education, or a new job that you always wanted to try but couldn’t because you were too stressed about your bills. Many of my clients report that they feel so much less stress after filing bankruptcy and they are relieved to no longer have to worry every time they answer their phones or go to the mailbox. Call the Law Office of Kimberly A. Sheek today to start your new financial future.

Discuss your financial situation with me in a confidential consultation. Call (704) 842-9776 or reach out through our online form.

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