Dear Credit Card Adviser,
I have a credit card that I am unable to pay off. I have retirement accounts with the same bank that issues the card. If I default on my credit card, how will it affect my retirement funds?
Before a delinquent credit card could jeopardize the money you’ve set aside for retirement, you’d have to be successfully sued by the financial firm (or the third party it sells the debt to) and have a judgment placed against you.
The fact that your credit card and your retirement funds are with the same bank is moot, as the firm would “have no better ability” to get at certain retirement assets than one you aren’t currently doing business with, says Ed Boltz, president of the National Association of Consumer Bankruptcy Attorneys.
There are federal and state laws that govern what can be seized once a creditor does have the official go-ahead to collect on the debt.
Federal benefits, including Social Security and a U.S. Department of Veterans Affairs pension , are generally exempt from garnishment. The exception here is if the creditor in question is the U.S. government, but since we’re talking about credit card debt, this caveat isn’t applicable. Pensions, IRAs and 401(k) plans are also generally protected … until you start withdrawing the funds.
“Your assets from your bank account can be seized” following a judgment in favor of the creditor or collector, says Suzanne Martindale, a staff attorney for Consumers Union. So, if you funnel your retirement funds into your checking account, it’s technically fair game.
Procedures for garnishment vary by state. However, once the creditor secures approval, it “gets all the money in your bank account up to the judgment amount,” says Meaghan Tuohey-Kay, a New Jersey-based attorney. Unlike a wage garnishment, this levy is only allowed to hit once, she adds. So, if you only have $1,000 in your bank account but you owe $4,000, the creditor can take the $1,000, but would have to repeat the approval procedure in order to garnish your bank account again for the outstanding debt.
“Creditors try to levy on all types of things they’re not supposed to,” Tuohey-Kay says. There is a federal rule to ensure creditors don’t take federal benefits, but a bank could put a hold on the account in question while it investigates which funds should be left alone. The problem with that is “you won’t be able to touch (the money) until it’s sorted out,” she says.
To avoid this, your best course of action is to avoid getting to judgment. Time frames vary, but credit card accounts are typically charged off when they are 180 days past due. At that point, the debt “can get assigned to a third-party collector or sold to a debt buyer,” Martindale says.
Try talking to your issuer before your account gets to the charge-off stage.
“When you start to fall behind, it always pays to be proactive,” Martindale says. “Call your creditor, tell them you can’t pay and see if you can work out a payment plan.”
Most creditors are happy to work something out, “because it costs them money to go through all these steps,” Tuohey-Kay says.
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