One of the saddest mistakes I see potential clients make over and over again is taking exempt assets that are protected in bankruptcy – usually 401K and IRA funds – and cashing them out to try and save a sinking house or paying off large amounts of credit card debt.  This is perhaps the worst use of those funds which are protected through bankruptcy proceedings.  In Nevada you can file Chapter 7 ‘liquidation’ bankruptcy and still protect $500,000 in your retirement account. Your creditors, even if they foreclose on a home or sue you and get a judgment, cannot collect against most funds held in retirement accounts. Some people cry when I tell them that, because they’ve already spent their retirement money on upside-down houses or credit cards that were in collection.

There are many “debt consolidation” companies and those that advertise heavily about “Do you have $10,000 in debt or more?  Then you may qualify for our SECRET/government approved program…”  There’s no secret.  What they do is take your exempt and protected retirement money and have you cash it out to settle out accounts with your creditors, and usually charge several times the fees of a bankruptcy attorney to do so.

It’s heartbreaking to meet with people who have cashed out their entire retirement to try and prevent foreclosure on a home or property, and I see it all the time.  If you’re considering using 401K money to save your home then stop! Don’t touch your retirement.  Keep it.  Consider bankruptcy and wipe out your unsecured debts like credit cards or medical debts. If your house is hopelessly behind in payments, or only worth half of what you owe, then surrender it in bankruptcy and eliminate the debt of the house.  You’ll have a few months in the house after filing to save up a deposit on a rental.  Your credit score will recover, and you can look again at property within a few years, but you’ll never get those retirement savings back if you through it all onto your bonfire of debt.