For an individual who is deeply in debt yet wishes to avoid bankruptcy, a debt settlement arrangement with his creditor may be a viable solution. IRA accounts can help facilitate settlement agreements.
Facts
Debt settlement permits a debtor to pay his creditor less than he owes to satisfy a debt. IRA accounts hold various forms of retirement investments such as stocks, bonds and money market funds.
Significance
Creditors often settle for less when a debtor can make a lump sum payment to settle her debts. The funds present in an IRA account may allow an individual to pay off her debt settlement with one payment rather than making a series of payments over time.
Features
An individual must pay taxes on the investments present in his IRA should he choose to cash it in early to settle debts.
Considerations
IRAs exist to help consumers save for retirement. If a debtor is close to retirement age, she may not be able to replenish the funds she withdrew from the IRA to settle her debts. Thus, an individual must evaluate whether a lump sum debt settlement is worth losing her retirement savings.
Warning
Interest accumulates over time on the investments present within an individual's IRA. When a consumer cashes in his IRA and withdraws funds to settle a debt, he not only loses a portion of his retirement savings, he loses the interest that money would have brought him every year until retirement.
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