More and more, we meet with prospective clients who, prior to contacting us, have taken loans from, or cashed-out, their 401k, IRA, Pension, or other retirement account simply to make ends meet and keep up with their bills. This is certainly an understandable step that an honest person, intent on paying back their debts, would take in order to avoid having to file for bankruptcy.

The problem with taking this step is that, unfortunately, in most situations, dipping into a retirement account acts more as a band-aid for the debt problems than a resolution; it only serves to delay the inevitable rather than cure the debt problems (especially when there is significant credit card debt, and paying the minimums only serves to pay the monthly interest, and none, or very little, of the principal balance).

After meeting with us, the most common response we hear from people who have dipped into their retirement accounts is: "I wish I had called you a year ago." The reason for this response is that, during the consultation, I am usually able to inform the prospective client that their 401k, IRA, Pension, or other qualified retirement account is 100% "exempt" from the bankruptcy proceeding; meaning they will not lose anything from these accounts in a Chapter 7 bankruptcy or Chapter 13 bankruptcy.

The reason I am able to tell them this is because bankruptcy law provides for "exemptions" or protections for certain property in a Chapter 7 bankruptcy or Chapter 13 bankruptcy that a person can "exempt" or protect through a bankruptcy proceeding, and which the bankruptcy court can therefore not touch. Some common examples of these protections include equity in a home, equity in vehicles, money in a bank account, personal injury awards, and many, many more (in fact, while these "exemptions" only go so far, it is actually quite rare that a person will stand to lose anything of value that they do not want to lose. Every situation is different though, so it is wise and recommended that you consult with an attorney regarding your specific situation). There is also a 100% exemption for virtually all qualified retirement accounts, including 401k, IRA, Pension, etc.

You may have heard that there were major changes to the bankruptcy laws back in October of 2005. These changes are generally referred to as the Bankruptcy Abuse Prevention and Consumer Protection Act, or BAPCPA for short. Most of the BAPCPA changes were not what we would call "Debtor friendly," and were largely aimed at making it more difficult to file for a Chapter 7 bankruptcy and Chapter 13 bankruptcy (or had the unintended consequences of making it more difficult to file for bankruptcy). However, one area of change that was "Debtor friendly" involved providing greater protections for a Debtor's (person in bankruptcy) qualified retirement account(s). As a result of these changes, 100% of virtually all qualified retirement accounts are now protected during the bankruptcy process. Again, meaning that you will not lose anything from these accounts in the bankruptcy process.

As the saying goes, "knowledge is power;" and this saying holds true for bankruptcy as well. In general, because retirement accounts are 100% protected in a bankruptcy, unless dipping into or cashing out a retirement account will solve your debt problems and not simply serve to delay the inevitable, the filing of a bankruptcy to resolve your debt problems should be considered, and a bankruptcy attorney should be consulted sooner than later so that you won't be the one saying "I wish I had called you a year ago."