Kentucky Bankruptcy Law

Counsel with Care

Tips for Tough Times #2

In my last post I discussed a general strategy for going a little further into debt in the event of a crisis such as lost employment or major illness. I want to clarify that the intent is not to figure out how to “trick” the system; rather, the intent is to be shrewd in surviving tough times. While some folks will misuse the suggestions, my hope is that honest folks who want and plan to repay their debt if possible once they get back on their feet, will use the information to plan for worst case contingencies.

Given that preface, another temptation to avoid during tough times is raiding retirement accounts to make ends meet. Much like the strategy of maximizing your homestead exemption, leaving retirement accounts intact maximizes your assets across a bankruptcy. In a Chapter 7 or Chapter 13, retirement account funds are exempt up to a “reasonable” need level which varies based on how close to retirement one is. I routinely see retirement accounts in the two and three hundred thousand dollar range for a middle-aged person go without challenge by the trustee. I suspect that even retirement accounts double that could pass muster, but I rarely see ones that large.

To dip into these accounts means converting exempt funds into payments on debt that will end up discharged in a bankruptcy anyway or leaves cash lying about which is much harder to exempt. Taking funds out (unless you meet qualifying events such as age, etc.) not only converts exempt funds into non-exempt, but you will also likely incur a federal tax penalty for early withdrawal. Such taxes would be unlikely to get discharged in a bankruptcy (unless it is a particularly old tax debt). So, if you have unsecured credit available to you during a crisis, it is best to use that resource to pay for necessities than dipping into your retirement.

Loans from your retirement are a more acceptable means of acquiring resources in a crisis because you are expected to repay those loans despite a bankruptcy. One must still be careful, though, because failure to repay timely can cause the loan to be treated as a disbursement and taxed. The other downside to loans is that instead of having the funds available as a post-bankruptcy resource to use to re-build, you are having to use post-bankruptcy income to repay it.

March 13, 2013 Posted by | Bankruptcy | , , , , , | 2 Comments