If you are struggling with financial obligations, there is no “one size fits all” approach. People in different situations take different approaches. Some may decide to take out a personal loan to pay down their high interest credit card debt. Others may decide that it is better for them to negotiate a repayment plan directly with their creditors to make their monthly payments more affordable. Others may decide that the protections that bankruptcy offers for their assets are an attractive option.
Bankruptcy, as well as other debt relief options, has its positives and negatives. It is therefore important to consider how each option would affect your long-term financial situation before deciding how to proceed. One area of particular importance to consider is your retirement savings.
If you have been working for a while and have built up significant savings, you may be inclined to dip into your retirement funds or use them as collateral for a loan to pay off your debt. Although this may seem like a good way to get rid of burdensome debt, in reality, there are significant downsides.
For one, it is rarely justifiable to steal from your future to pay for your past or present expenses. Depending on when you withdraw the funds, you may or may not have enough time to replenish the funds before your retirement. Even if you succeed at replenishing the funds, you still have lost many years’ worth of market gains that could have been realized if you had left the funds alone.
Additionally, raiding your retirement funds carry significant early-withdrawal penalties. On top of the penalties, you would likely owe taxes on the money withdrawn, as it is considered income. As the taxes and penalties would take a substantial chunk of your withdrawals, you would have less money left over to pay your debts.
If you are struggling with debt and are unable to work out a repayment arrangement with your creditors, bankruptcy may be the best way to protect your retirement holdings that you have worked hard to establish. Under North Carolina state law, most retirement plans and pensions are exempt from becoming part of your bankruptcy estate. This means that your retirement funds cannot be used to pay your debts during a Chapter 7 or Chapter 13 bankruptcy.
Although bankruptcy can ensure that you keep most of your retirement assets, it may not be the best solution for you. To learn more about the debt-relief options available to you, and the pros and cons of each, consult with an experienced bankruptcy attorney.