When facing bankruptcy, you have to consider all of your options. Feeling overwhelmed and wanting relief from creditors may lead you to make decisions that seem responsible in the short term but can have devastating consequences long term.

Some who are filing bankruptcy are sacrificing their savings and retirement in the process by not contributing to their retirement or taking out loans and distributions to try staving off creditors or avoiding bankruptcy. In other words, they are trading their future financial security for the immediate crisis.

Both legal and financial experts say this is a huge mistake that puts your future at risk. “Most folks do not want to file for bankruptcy and they try everything they can to avoid it,” says John Colwell, President of the National Association of Consumer Bankruptcy Attorneys. “They pay down the debt in this way [using their 401(k)], and then the debt mounts again, and filing for bankruptcy becomes the inevitable option.”

Your 401(K) is protected in bankruptcy by federal law by ERISA (Employee Retirement Income Security Act of 1974). This law sets minimum standards protecting individuals who regularly contribute to retirement accounts. “The special thing about a 401(k) is that it isn’t considered property of the [bankruptcy] estate,” Colwell says. “It floats across the top of the bankruptcy.”

Draining your retirement account to avoid bankruptcy and satisfy debts leave you in a tough spot long term. By taking this approach you leave yourself no cushion to fall back on. There are also certain factors such as age, poor health, or inability to enter back into the job market that make re-building your financial situation difficult or even impossible.

Simply put, don’t use your retirement to pay off your debts. From a financial stand point it is not a good decision as it puts your future in jeopardy. If you are facing potential bankruptcy, the best decision to make is to consult with an attorney to help you understand the “big picture” of your situation.

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