If you have a pension or a retirement plan, then chances are that you worked hard for decades to get it. You have been contributing for years and now you can finally start receiving monthly distributions. With the cost of living always on the rise, you will need every dollar upon retirement. Yet, people are using their pension proceeds to pay outstanding debts and obligations all the time. Spending retirement funds on paying off your debts is almost always bad idea. It should not be a quick fix solution to escape bankruptcy. Recently, I had a couple come to my office where the husband cashed out his 401k to pay $30,000 of IRS tax debt. The husband was in his late 60’s and most likely will not have the opportunity to replenish his retirement fund as opposed to a person in their 30’s. As a previous government employee, the husband was receiving five thousand dollars a month as his pension. After accumulating state and federal income taxes for several years, they received a notice from the IRS of intent to levy on their house in order to satisfy the outstanding tax bill. In a panic, the husband cashed in $30,000 of his 401k to pay the IRS. After advising the couple that they could save their pension funds and still keep their home by filing a Chapter 13 bankruptcy, they decided to pay a lump sum to the IRS instead due to the “stigma” bankruptcy would carry on their credit. This is not to say that filing for bankruptcy would have been the best resolution for this couple, but the fact that they chose to deplete their pension plan in lieu of a cheaper and readily available solution is mind blowing. While it may not be obvious to many people why using pension proceeds to pay debts is a terrible idea, the following are a few of the several reasons:
Retirement Plans are Protected Under State & Federal Law
New York State and every other state provides for laws that protect qualified retirement and pension funds. Although such funds are protected under federal law, which makes them exempt under bankruptcy laws, this rule does not apply to the IRS. The agency has the power to levy against your retirement accounts and social security benefits. The only way you can protect your funds from the IRS is by filing bankruptcy. This means that if you file for bankruptcy, your creditors or the IRS cannot make a claim against your pension plan to satisfy outstanding obligations, and the trustee cannot withdraw money from your pension account to pay off creditors. So why would anyone pay creditors with the money they so desperately need and the creditors cannot touch.
You Can Arrange Payment Under a Monthly Plan
Not all debts qualify to be forgiven (“discharged”) in bankruptcy. Some of the non-dischargeable debts include child support payments, alimony, and taxes. It would then make sense to pay the IRS with your retirement funds since there is no escaping it, right? Although some of your taxes (that are three years or older) may be discharged, and most may not, assuming you qualify for a Chapter 13 bankruptcy, you can pay them off within a 60-month period instead of one lump sum. A payment plan should always be favorable to depleting a major asset you future depends on. You are also free to negotiating a payment plan by yourself with your creditors rather than using your pension money.
There May be Penalties on Withdrawn Pension Funds
Most retirement plans have a penalty if you withdraw funds earlier than the maturity date. The penalty is a form of taxes calculated based on the amount you withdraw. Such an undertaking will add to the taxes you may already owe, therefore creating new debt, and further exhausting your pension fund.
You May Be Able to Discharge a Significant Potion of Your Debts
Clients consult with bankruptcy lawyers all the time, and then decide to do whatever they can to avoid filing for bankruptcy. They take all means necessary such as depleting their savings and retirement funds to pay past due pay taxes and credit card bills. They pay off one credit card in full, while the other comes knocking with a judgment shortly after. They pay their past due taxes to the IRS for the preceding years, while the upcoming year they are in a hole to the IRS once more. Instead of paying your credit card bill and the significant amount of interest you incurred over the years, why not consider not paying them nothing at all, or only a small portion of the debt. Also, it just might be that several years of your taxes may be forgiven in your bankruptcy case. Imagine all the money you can save and the stress-free life you can enjoy without debt constantly weighing on your shoulders.
Consider Bankruptcy As An Option First
Bankruptcy should always be considered as an option before paying off creditors in a large sum and approaching past due debts. Sometimes utilizing pension proceeds may be the best and only option, but other alternative should also be explored thoroughly. You should always meet with a seasoned bankruptcy lawyer PRIOR to withdrawing funds from your retirement to pay your debts. Make sure to not take the blind approach, and thoroughly weigh the effect on your future if you deplete a majority of your assets tomorrow.
Mishiyeva Law- Bankruptcy Lawyer NYC 80 Wall Street New York, NY 10005 (646) 736-6328 kmbankruptcylawyerny.com