Most retirement accounts are protected from seizure by creditors. Therefore, if you have serious debt, a retirement account, and feel like bankruptcy may be in your future, you shouldn’t do the following:
1. Don’t Cash It Out The fact that you are having to pull money from the account is a sign that you should be talking to a bankruptcy attorney. Once you take the money out of it’s protected “cocoon”, it may not be safe from creditors and the bankruptcy trustee.
2. Don’t Borrow Against It Borrowing against the retirement account can create a number of problems. The first is similar to the “cash out” problem mentioned above. The cash in your hand is not protected. You have also created a new “debt”, that must be paid or you may suffer tax consequences.
3. Don’t Use The Account As Collateral For a Loan Doing so could jeopardize the full effect of the retirement account protection.
If you feel like you need the funds from your retirement account to survive, and you have serious debt issues, spend the time to speak to an experienced bankruptcy attorney first. You may be glad you did.