The number of older Americans filing for bankruptcy today is three times what it was in 1991. A combination of factors has contributed to the increase, including rising health care costs and a decline in pension benefits. Generally speaking, older Americans have fewer retirement funds today than in the past. This puts them at a greater risk for bankruptcy. In many cases, a 401(k) savings plan is the only cushion they have to fall back on.

Because older Americans want to honor their obligations, many are reluctant to file for bankruptcy. To avoid filing, some draw down all or a significant portion of their 401(k) savings and use it to pay off debts. What often happens, though, is that they incur subsequent debt due to matters such as health emergencies and are left with no way to pay it off.

Financial professionals say that using 401(k) funds to pay off debt is a mistake because federal law does not consider such funds to be property. Therefore, the funds are protected from being seized by a creditor. However, if a person transfers funds out of a 401(k) account into a regular account, the federal protection is lost. Additionally, the government imposes a 10% penalty on funds that are transferred before a person reaches the age of 59 1/2.

Many older Americans are struggling financially due to the amount of debt they are carrying. Even if they are able and willing to work, it may be difficult to secure a well-paying job because of age discrimination. In such cases, the best solution may be to file for bankruptcy. In order to understand all the available options, a debtor could enlist the services of a law firm with experience in both debt relief and bankruptcy protection.