Tapping Protected Accounts

In order to avoid bankruptcy it is common for a debtor to tap otherwise protected assets (e.g. IRA accounts, 401k accounts, 403b accounts, 529 accounts, etc.). Because of financial, legal and ethical considerations it is understandable why a debtor would make significant efforts to avoid a bankruptcy filing. The decision to tap those otherwise protected accounts is a difficult one because the asset being turned over voluntarily is an asset that a creditor could not have reached involuntarily and the debtor will often suffer tax consequences as a result and it may be difficult to rebuild the funds lost as a result. Some possible considerations would be the age of the debtor, the health of the debtor, the consequence of nonpayment, the comprehensiveness of the solution obtained by tapping the funds, the budget of the debtor and the financial resources of the debtor. To use extreme examples it is likely more appropriate to a 25 year old to tap a protected account to satisfy a federal tax lien then it is for a 58 year old with no other assets and very little income to tap a protected account to satisfy a credit card obligation. Regardless, if a decision is made to file bankruptcy it is generally best for the debtor to leave funds in the protected account up until the time the bankruptcy case is filed. If funds are moved from a protected account into a general depository account then those funds may lose the protected status.