As a bankruptcy paralegal, I see the heartbreak it causes clients when they lose their home. I try to comfort them as best as I can; however, unless you have actually lost your home through foreclosure it is difficult to understand the emotions people are experiencing as they lose their home. Unfortunately, many of our clients have also exhausted their entire retirement and savings try to save their home just to lose it anyway. This begs the question - - should a person use their retirement to save their home?
In South Carolina, as in most other districts, qualified retirement plans are 100% exempt. This means that neither creditors nor the bankruptcy estate can attach or levy qualified retirement accounts to pay debts. However, once funds are removed from a qualified retirement account, the funds are no longer exempt and may be taken by the bankruptcy trustee to pay creditors. While some clients are successful in saving their home by using retirement funds, many are not.
Things to consider before removing retirement funds from savings:
- · Can I afford my mortgage payment going forward? You must be completely honest with yourself when answering this question. If you use retirement funds to catch up mortgage payments, will you be able to keep the payments current going forward? Create an honest household budget, planning for emergencies and unexpected bills, to determine if you truly are able to afford your house payment. If not, you may want to consider surrendering the home through bankruptcy and getting a fresh start.
- · What caused the mortgage delinquency? If the reason you are behind on your mortgage payments was something short-term, then you may be able to save your home with retirement funds and not have any problems. However, consider the reason why you are behind and ask yourself what is the likelihood of this happening again in the future. If you think you may find yourself behind on your mortgage again in six months, you may need to rethink pulling out retirement funds.
- · What is the total of the mortgage delinquency? If the amount of the delinquency will deplete your retirement, you need seriously to consider your options. You may be unable to replace those funds in the future and find yourself facing mortgage payments after retirement with no retirement savings to help pay the expense.
- · Can you replace the retirement funds before you retire? Even if the amount you withdraw from retirement does not deplete the account, make sure you have sufficient time to replace those funds before retirement. Keep in mind that you need to replace what you withdrew while continuing to put money into retirement savings. Going forward, you will need to contribute a higher amount to your retirement account in order to meet your goal for retirement.
- · Consider the penalties and tax consequences for withdrawing funds from retirement early. Some retirement accounts may have penalties for early withdrawal. Furthermore, there are tax consequences when you withdraw funds from retirement before you reach retirement age. Before cashing in your IRA or withdrawing funds from your 401k account, talk to a tax specialist to weigh the costs against giving up your home.
I recently filed a bankruptcy case for a couple who outlived their retirement savings and had to give up their home. They planned carefully and had sufficient savings for retirement; however, they continued to accumulate debt and use retirement funds to pay the debt. Eventually, the retirement funds ran out and they had to file bankruptcy and give up their home. Before withdrawing funds from your retirement account to save your home from foreclosure, consider all of the pros and cons to make sure you are making the best decision for your long-term financial goals.
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