In my 22 years as a consumer and business bankruptcy attorney, I have represented over 5,000 clients. I can honestly say that very few of these clients have had a good financial plan. If they did, they wouldn’t be in my office speaking to a bankruptcy attorney.
One of the most common pre-bankruptcy mistakes is taking money out of 401k plans or IRA in order to pay off credit card debt. Retirement funds, like 401ks and IRAs, are exempt property and are fully protected from both creditors and bankruptcy trustees. The only way that creditors can touch that money is if you voluntarily remove it from your account and give it to them. Many of my clients, prior to speaking with me, have taken money out of retirement and used it to make their minimum payments. It always proves to be only a short term fix. When the money runs out (usualy sooner, rather than later), they still owe more money than they can pay to their creditors, and on top of that, they now owe taxes on their retirement account withdrawals.
Everyone should have a financial plan if they want to retire at some point. Even if your plan is as simple as saving a percentage of your salary in a company matched 401k plan, you need something. Also, anyone can open an IRA; it doesn’t need to be a company plan. Placing even a portion of your retirement funds into one of these accounts will be a good start to a protected future. There is no better time to start planning than now. Or, if you already have a plan, now is a good time to revamp your financial plan for the future.
I truly believe that bankruptcy should not be considered either a financial or personal failure. I suggest that, instead, consider bankruptcy as a part of your financial plan for the future. Any client who has come see me was worried about their debts. I don’t want them to be worried about what they owe. I want them to begin to look forward, protect what they have, and build for the future. In most situations, issues regarding debt will eventually get sorted out, either in or out of bankruptcy. Protecting assets is what they should really be focusing on. So, am I saying what you think I’m saying? Yes, I am. Protect your 401k and/or IRA and worry less about your debts. Why? Because if you know these assets are protected, and your plan is to protect these assets at all costs, you will realize much sooner that it is in your best interest to file for bankruptcy protection. In this way, you will have eliminated your dischargeable debts, and protected your key assets to move forward. That’s what I call financial planning!