Citing research done by Vanguard Group, A record 2.8% of the five million people in 401(k) plans run by Vanguard Group tapped their retirement savings in 2022 to cope with hardships such as medical bills, eviction, or foreclosure, the company said. That is up from 2.1% in 2021 and a pre-pandemic average of about 2%.”

Additionally, according to Vanguard, individual financial circumstances played a role, with American households displaying signs of financial strain. Credit card balances reached their pre-pandemic levels in September. Americans saved 3.4% of their monthly income in December, down from 7.5% in the same month last year. Microsoft Corp. and Inc. have both recently announced layoffs.

Should I Avoid Filing For Bankruptcy?

Here is some information that can put your mind at ease if you’re thinking about withdrawing your retirement funds to pay off debt or are concerned that filing for bankruptcy will affect your 401(k). Your 401(k) is typically secure. Due to federal law’s protection of such accounts from creditors and bankruptcy trustees, you won’t lose the money in your account due to filing for bankruptcy.

Keep in mind that the goal of bankruptcy law is not to make life more difficult for those who file but to assist them in getting back on their feet financially. The result is that filers retain everything. Filers retain the possessions required to keep a home and a job.

For more information on California Bankruptcy and protecting your retirement accounts, call 800.400.9000 and speak to a bankruptcy lawyer from Winterbotham Parham Teeple, a PC today.

Bankruptcy; A Beneficial Solution

Depending on your financial situation, bankruptcy may be a viable option. Unless all of your debts can be paid off, it’s usually not a good idea to use the funds in your retirement account. In most cases, it will simply bandage the problem, and you will eventually file for bankruptcy anyway. Furthermore, you will lose your retirement savings and be subject to early withdrawal fees and tax penalties.

Preserving 401(k) and ERISA-Qualified Retirement Accounts Prior to Filing for Bankruptcy

The advantage of this protection is that you can declare bankruptcy without jeopardizing your savings. Avoid doing the following things before filing for bankruptcy to maximize your assets:

  • Refrain from cashing out your 401(k) (k). Not only will the funds lose their protection once transferred to another account, but it would be wasteful to use the funds to pay bills that can be discharged in bankruptcy.
  • Don’t rely on your 401(k) to keep you afloat. Avoiding bankruptcy by paying off debt with a 401(k) loan that you can repay over time. However, the penalties for cashing out a 401(k) are steep, so using the funds for living expenses is often a bad idea, especially when bankruptcy is unavoidable. You’d better file for bankruptcy sooner and keep your 401(k).
  • Before moving money near the time of bankruptcy, consult with a lawyer. Moving cash or a savings account balance that isn’t protected in bankruptcy into your 401(k) shortly before filing may be a good idea, but it can land you in hot water. If it appeared that you intended to avoid paying creditors, the trustee appointed to oversee your case might suspect fraud.

What If I Use My Retirement Accounts As A Source Of Income?

Your retirement income may be considered when determining your eligibility for Chapter 7 bankruptcy. It may also be calculated as part of the Chapter 13 repayment plan. Any income from your retirement plan can be considered during the means test. Social Security payments, on the other hand, are not considered income and will not be considered when determining your eligibility to file for bankruptcy.

Speak To a Bankruptcy Lawyer From Winterbotham Parham Teeple, a PC

The attorneys at Winterbotham Parham Teeple, a PC, who specialize in bankruptcy law and help clients improve their financial situations, can help you navigate the bankruptcy process and avoid some of its risks. They can also help you make the right decisions, from avoiding certain actions to determining the best type of bankruptcy for you. Other options and alternatives may be investigated in some cases. For a free evaluation, please call 800.400.9000.