Contrary to popular belief, filing for bankruptcy does not mean giving up all of your assets and earthly possessions. There are many types of assets that are actually protected during this process, which means that you can get a fresh financial start without worrying about being left with nothing. A retirement account like a 401(k) is a good example of something that can be protected from creditors when you file. A Bergen County bankruptcy lawyer can tell you more.
Is a Retirement Account Protected in Bankruptcy?
The simple answer is yes, your retirement account, like a 401(k), should be protected in bankruptcy. When you file for Chapter 7 bankruptcy, you agree to liquidate your assets and use that money to pay your creditors. However, some assets are protected or exempt from this process. Your 401(k) is among those protected assets, so you do not have to empty the account and use it to pay off debts.
When you file for Chapter 13 bankruptcy, you don’t have to sell off anything or drain your bank accounts to pay creditors. Instead, you make a payment plan that your creditors agree to. Then you pay off your debt over three to five years. You keep your 401(k) and can save those funds for when you reach retirement age.
Should I Use a Retirement Account to Pay Off Debts?
Some people considering bankruptcy look at their retirement account or 401(k) and think “Why not use this money to pay off my debts?” You would avoid all of the rigamarole that comes with filing for bankruptcy and your credit score wouldn’t take that massive hit.
Taking money from your retirement account is a bad idea for a few reasons though. You could end up:
- Having to work longer to make enough money to retire
- Dealing with tax penalties due to the early withdrawal of funds
- Paying income tax on any money you take out
- Losing out on interest you would have gained otherwise
Your funds could also end up not being protected if you take them out and leave them in an account that is not protected by the bankruptcy process. We recommend talking to a lawyer before you do anything.
Should I Hire a Bankruptcy Lawyer?
You should think about hiring a bankruptcy attorney if you decide that filing for bankruptcy is your best option. Whether you choose Chapter 7 or Chapter 13 bankruptcy, this process can take a lot of work and involve a lot of paperwork. Any mistakes can end up wasting your time and money. Our experienced bankruptcy lawyers can guide you through this and make it as painless as possible.
Contact Our Law Firm
If you want to learn more about filing for bankruptcy, how the process works, and whether this is the right option for you, contact our law firm. Schedule a consultation with the team here at the Law Office of Boyd & Squitieri to get all of your questions answered.
