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As a bankruptcy attorney, I have clients who come in and have either spent down their retirement savings or, in some cases, never started. I have a couple clients now who never started. They were small business owners. One did not successfully make the transition to on-line sales. The other's problem was just poor timing. Eventually, the businesses were forced to close. They had a good deal of debt, which was personally guaranteed or placed on credit cards. Now, most of the debts are in collections or reduced to judgments and they are planning for bankruptcy. This is not an uncommon story.
As I was preparing their cases, I asked about 401(K)'s, SEP's, IRA's, etc. One told me his accountant advised that a better plan was to pay down the debt first then start his retirement savings afterwards. The other client just didn't feel like she was able to start. While my clients had some great years and paying off the debt was not a worry, times changed. Unfortunately, they never paid off the debts and bankruptcy is being considered or has occurred. Had my clients saved money in an IRA during the good times, they would have a valuable asset they could protect.
I am not suggesting anyone should put money away to hide it from creditors. I am suggesting if you set up a "Pay Yourself First" type budget to appropriately save for retirement, you will not be penalized if you find yourself in a bankruptcy case.
Another common step taken by clients is to withdraw money from a retirement account to try to get debt under control. I have had clients that spent all their retirement money and still needed to file for bankruptcy protection anyway. If you are thinking about dipping into your 401(K), SEP or IRA, you may be in more financial trouble than you realize. Most retirement accounts are protected in a bankruptcy case. You should consider meeting with a bankruptcy before you take that step.
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