Should I liquidate My 401(k) or IRA to Satisfy My Creditors’ Claims?
Timothy M. Hughes • May 5, 2020
You should not
liquidate your 401(k) or IRA to satisfy your creditors’ claims. Here is why: the money you put in your retirement account is for your future. The Federal tax laws recognize this as a lofty goal and provide tax benefits for you to do so. Further, in Illinois, the money you put in a retirement account such as your 401(k) or IRA is likely exempt from the reach of creditors both inside and outside bankruptcy. If you were to file either a Chapter 7 or 13 bankruptcy in Illinois and have $100,000 in your 401(k) or IRA when you exit bankruptcy, you should still have that amount of money. So using it to hold off creditors today does not help you in the long-run and may in fact also hurt you in the short run. This is because you would not only be depleting that asset, but taking the money out early would create a taxable event at a time when your cash flow is poor – and IRS penalties and interest can be onerous.
In addition, retirement accounts have many advantages. Among the lesser-known benefits is legal protection of the funds in retirement accounts from claims of creditors. Under bankruptcy law, funds in a retirement account are not subject to creditors’ claims. This is because the retirement account is exempt from inclusion in the bankruptcy estate. This means that the retirement account holder can go through bankruptcy, have all of his or her dischargeable debts discharged, and retain all the money in his or her IRA. The purpose for this protection of retirement accounts is to help debtors who go through bankruptcy obtain a fresh start. Therefore, liquidating a retirement account to satisfy a creditor’s claim is contra this policy.
One should, however, keep in mind that while the protection given to a retirement account is great, it is not absolute. This is because the formation of the retirement account or the nature of a transaction with the account in the past four years could limit the protection afforded to a retirement account. It is therefore important to analyze the account before filing for bankruptcy protection.
If you would like more details, please do not hesitate to call our office. Our office has been successful in helping consumers with collection problems for over 28 years. If you have a debt or tax problem please contact me at (847) 705-9698 or thughes@lavellelaw.com
and find out how we can help you. We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.
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