By the time many of our bankruptcy clients come to has they have exhausted most of their personal savings, and often their retirement assets. Some people invade these funds — that are intended to provide income in retirement — and use them to try make minimum payments on credit cards and cover living expenses. This is a very common scenario we see for people who have lost their job and unemployment has run out.
In bankruptcy, retirement assets, such as I.R.A.s and 401(k) are generally exempt. If someone intends to file bankruptcy and get a fresh start from their debts it doesn’t make a lot of sense to
use up an asset that you get to keep in bankruptcy to pay a debt that will get wipe out in the bankruptcy. Of course, some types of debt don’t get wiped out in bankruptcy (i.e, are nondischargeable), such as child support and other domestic support obligations, student loans, and certain taxes, among others. That is a somewhat different situation, but using retirement funds is still something that should viewed as a very last resort. There are also tax consequences of withdrawing funds from a retirement account.