Written by Dean Weber, Esq. and Craig D. Robins, Esq.
Consumers with overwhelming debt are often better off filing for bankruptcy, than touching their hard-earned pension and retirement savings
With overwhelming debt on their shoulders, many Long Island consumers feel that the economy is at the precipice of near collapse. The national debt is soaring and the unemployment rate is at a post-WWII record level. Bankruptcy filings are also at a near-record level, as people seek debt relief that only bankruptcy protection can afford.
With many consumers quickly eating through their savings accounts to make ends meet, and with additional access to credit becoming very tight and often unavailable, many Long Islanders are tempted to borrow against their 401-K, IRA, Keough, pension or other retirement accounts. However this is a big mistake – no matter how easy.
For some the enticement is too hard to resist as there are even credit card companies and banks that offer ways for people to easily cave in to that temptation – by making such borrowing as simple as utilizing a credit card – just as if it were a “normal” debit card.
However, this practice – withdrawing funds from any retirement account – should be avoided at all costs. Why? Because, in the State of New York, retirement funds are exempt. They are totally protected from creditors when a consumer files for bankruptcy relief. In almost all cases, the retirement and pension funds are absolutely exempt in personal bankruptcy filings whether Chapter 7 or Chapter 13 bankruptcy.
However, other funds such as cash and money in the bank are susceptible to being appropriated by a bankruptcy trustee if they add up to more than $2,500 per person. Although cash and money are only protected up to $2,500, pension funds and retirement accounts are usually fully protected.
Thus, it is crucial that a consumer considering bankruptcy maintain their pension and retirement assets. Once a retirement account is tapped, those funds are no longer safe – they become part of the debtor’s current cash account – and therefore receive limited protection in bankruptcy.
In addition, when hard-earned funds are withdrawn from retirement accounts, there generally are heavy tax consequences.
For these reasons, it is very important to seek the advice of an experienced bankruptcy attorney prior to even thinking about withdrawing funds from retirement accounts, as the consequences are usually quite severe.