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Should you use your retirement funds to pay off debt?

On Behalf of | May 5, 2021 | Personal Bankruptcy | 0 comments

Individuals can face overwhelming debt for numerous reasons including divorce, job loss, medical emergencies or emergency home repairs. Faced with an uncertain financial future, many people will immediately explore their options to avoid peril. These options might include personal loans, debt consolidation and the early withdrawal of retirement funds.

Bankruptcy is the first option individuals should explore as it was specifically designed to give people a fresh financial start and does not typically carry the same fees, penalties and consequences as the other options mentioned previously.

You could face early withdrawal penalties

It might be difficult to ignore the lump sum of money sitting idly in your traditional IRA or 401(k) accounts. While there are some exceptions to early withdrawal restrictions, it is wise to remember that early withdrawal of these funds could possibly lead to additional taxes as well as penalties.

Based on compound interest, the longer the money remains untouched in the investment, the more it will continue to grow. No matter the amount of money in an IRA or 401(k), it is wise to leave it alone and look to bankruptcy as a strong option to help you avoid financial peril. People facing money trouble should simply ignore the money in their retirement accounts.

Depending on your unique situation, the two most common types of filing are Chapter 7 bankruptcy and Chapter 13 bankruptcy. Chapter 7 generally offers a quicker process and is usually referred to as “debt elimination.” If you have more assets in need of protection from repossession, foreclosure or liquidation, Chapter 13 might be the better option. It is critical that you discuss your options with an experienced bankruptcy attorney who can provide guidance uniquely tailored to your financial situation.