Drowning in Debt - How Tapping Retirement Accounts Can Sink You

Caught in a Deluge

During the Great Recession many people in Chicago faced unemployment and owned houses that weren’t worth their mortgage balances. To keep their heads above water, these families frequently relied on credit cards to take care of their daily necessities. For those fortunate enough to find work, they quickly found themselves swimming against a new tide: struggling to repay their high interest credit card debt. When paying the minimum balance became too difficult, the families began to reach for their nest eggs.

Chicagoans aren’t alone. The Employee Benefit Research Institute compiles data on how employees use their work benefits, which includes employer-sponsored retirement accounts like 401(k)s. The Institute found that in 2009, an unprecedented 21 percent of 20 million employer-sponsored plan participants had taken out loans against their retirement accounts.

Unfortunately, what many don’t know is that borrowing or cashing out a retirement plan to pay debts is one of the worst decisions an indebted individual can make. While this article will highlight the reasons why people should not use their retirement accounts to pay credit card debts, anyone overwhelmed by debt should consult with a Chicago bankruptcy attorney to discuss their options. People who understand the implications of the choices before them can be empowered to make the best decisions for themselves in their individual situations.

The Dangerous Lure of Retirement Loans

These types of loans can cause more harm than good and may not help an individual improve their financial situation. Loans against retirement accounts have no grace period attached to them, so the employee must start paying off a loan against a retirement account right away.

If the employee loses his or her job or is laid-off, they must either repay the loan in full or the loan will be converted into a withdrawal. The IRS imposes heavy penalties on retirement withdrawals, which more often than not leaves the former-employee with tax debt at heavy interest rates. This can put a person right back where they started.

The Safety of Bankruptcy

What many who choose to tap retirement accounts may not know is that retirement accounts are protected from creditors when someone declares bankruptcy. This means that it may be a better financial solution to file for bankruptcy-and keep one’s nest egg-than drain retirement accounts to make ends meet. Studies have shown that it is

Employer-sponsored retirement accounts, such as 401(k)s, are covered under the Employee Retirement Income Security Act, or ERISA. This means that creditors looking to collect on a debt cannot use retirement accounts as resources. Though individual retirement accounts, or IRAs, are not covered under ERISA, the federal government does protect up to roughly $1 million of IRA funds-or the entire account if it was a rollover from an employer-sponsored account-in a bankruptcy.

Bankruptcy offers a number of features that may make it easier for people to keep up with their monthly bills. If you have been struggling to keep your financial house afloat, you should talk with a Chicago bankruptcy attorney before you borrow from or cash in any of your retirement assets. An experience lawyer will review the available choices that can give you a fresh start.

Convenient Locations

In order to provide convenience for clients throughout Chicago and Northern Illinois, we have offices in the following locations: 

Chicago • Schaumburg  • Oakbrook • St. Charles • Naperville • And More


We have office locations throughout the Chicago Area:

Chicago (Downtown)


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All calls are routed through our Downtown office for your convenience.

Phone: 312-967-3159

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