May 30, 2009

Retired & Broke: Don't Use Retirement Funds To Pay Debts

The recession has hit people of every age and income level, including retirees and those contemplating retirement. A combination of falling real estate and stock prices combined with the loss of part-time employment gigs has meant that many retirees who, eighteen months ago, felt financially secure and now find that they can't pay their credit card debts.

Let's start with what not to do. First on the "no-no" list should be invading 401(k), IRA or other retirement funds to pay credit card or most other personal debt. The reason is simple: Money in these funds is exempt by law from being grabbed by creditors to pay debt-related court judgments for the very good reason that lawmakers have gone out of their way to reserve these funds for your retirement needs. Or, put another way, if you invade your retirement funds to pay personal debt, you voluntarily hand over funds that in most instances can't otherwise be touched.

And money in retirement funds isn't the only property that's exempt from being grabbed by creditors. In most states, under "homestead laws", considerable equity in your house is also exempt from being grabbed by credit card companies or others to whom you owe personal unsecured debts. For example, in California, the homestead exemption is $150,000 for people over 65 (or 55 for many low-income residents).

In addition, many states have a long list of other exempt property that is yours to keep no matter what your debt level.

So again, the larger point is that if you are a retiree facing a true debt crisis, it's key to understand debtor protection laws before you get stampeded into making poor decisions -- one of the poorest being to take fully protected retirement funds to pay off credit card debt. For the information necessary to come up with a debt workout plan that will fit you like a glove and not a handcuff, see Nolo's Solve Your Money Troubles, by Robin Leonard & Margaret Reiter, a book that's likely to save you at least 100 times what you pay for it. Now there's the best deal you've been offered in many a day.