Retirement accounts and credit card default

Some debtors in Illinois may wonder if defaulting on a credit card can affect retirement funds. According to a recent article, a creditor must file and win a lawsuit against the debtor before any accounts held by the debtor could be subject to withdrawals. Even if accounts and the credit card are both managed by the same company, the lender is unable to take funds out of the account without legal authorization.

When seeking funds to cover an outstanding balance, debt collectors are limited by certain state and federal regulations. For example, the money held in certain retirement accounts, such as IRAs and 401(k)s cannot be immediately accessed after the collection agency wins a judgment while checking accounts can be tapped. However, if the funds from the retirement accounts are transferred into a checking account, that money is now available to creditors.

In addition, some of the federal benefits that are completely exempt from such garnishments unless the creditor is the federal government. These include pensions from the U.S. Department of Veteran Affairs and Social Security benefits. However, accounts holding these funds could be frozen pending a ruling on cases brought by collection agencies against a consumer, keeping the person from using the funds for expenses.

While some accounts are protected from aggressive collection practices for credit card debt, some individuals may benefit from filing for more comprehensive federal protections through bankruptcy. Through that action, the consumer might be able to avoid harassment from creditors and create a foundation for a fresh financial start. An attorney that is familiar with different types of consumer bankruptcy might be able to help a client file and reorganize his or her finances.

Source: FOX Business, " Can Credit Card Company Garnish IRA?", Jeanine Skowronski, July 10, 2014

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