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Did you know that bankruptcy among older Americans is on an upswing? In fact, the number of people 65 and older who are filing bankruptcy has tripled since 1991. If you’re facing mounting debt and you’re trying to avoid declaring bankruptcy, you might be considering liquidating your 401(k). Here’s why the experts say that’s a really bad idea.

It’s totally understandable that you’d want to try and honor your obligations before resorting to bankruptcy. You might be afraid of the mark of a bankruptcy on your credit, and it may seem like using your retirement fund to pay down your debt is a reasonable idea. However, many people do this and then their debt accrues again, and they’re in a worse spot than they were before, facing the same situation with no cushion of savings to protect them. When the person is a senior citizen, this is a particularly precarious position to be in, because it’s hard for seniors to re-enter the job market and rebuild their financial lives.

The reason it’s not smart to cash out your 401(k) is that the funds in that account are protected in a bankruptcy. According to federal law, even if your assets are seized to repay your creditors, your retirement account is considered exempt. In most states, Roth IRAs are also exempt. Note: if you move any of your 401(k) from your employer-sponsored account into your personal savings or checking account, the exemption is nullified and those funds are fair game. If you tap into your 401(k) before you turn 60, you also incur penalties for early withdrawal. It’s best to leave the money in your retirement accounts completely alone until after you retire so that you will have the security of knowing you have money on which to retire.

So what’s a better answer for seniors struggling with debt? If possible, selling off some assets or refinancing your home to alleviate debt might be a solution. For seniors who are healthy enough to work, a part-time job might provide enough income to pay off some debt. For some, bankruptcy might be the best option available. To find the best solution for your particular situation, seek the help of an expert in debt relief.

If you’re struggling with debt and need information about debt relief, trust the compassionate, dedicated attorneys at Cutler & Associates to work with you and keep your best interests in mind. A Chicagoland bankruptcy firm, we have clients throughout the Chicago metropolitan area, and work hard to make sure our clients get what they need. Our offices are conveniently scattered throughout the area, with locations in Aurora, Chicago, Hoffman Estates, Lisle, Naperville, Oak Brook, Schaumburg, and Skokie. Contact us through our website, or call (773) 360-5802 for more information.