In an ideal world, you’ll have enough savings to live comfortably when retirement comes. But these days, escalating medical bills and credit card balances are afflicting more seniors with debt than ever before. More retirees are turning to bankruptcy in retirement, but there are important things to know before taking this step. In today’s blog, the bankruptcy lawyers at Groce & DeArmon, P.C. discuss things you should know about bankruptcy and retirement.
Choosing a Chapter
The two main types of consumer bankruptcy protection are Chapter 7 and Chapter 13. In a Chapter 7 filing, there’s no ceiling on the amount of debt you can eliminate. However, you may have to forfeit certain assets to the bankruptcy court before your case is discharged. When you file Chapter 13, you get to keep all your properties. But you must commit to repaying a predetermined amount of debt over three to five years.
Qualifying for Bankruptcy in Retirement
Before you can file a Chapter 7 appeal, you have to pass a means test. This test measures your ability to repay your debts based on how much you owe and your median household income and monthly expenses.
Thankfully, social security benefits aren’t considered as income for the means test. This can make it easier to qualify if your earnings come from a pension or retirement savings account. If you have too much disposable income to pass the means test, however, you’ll have to look at filing Chapter 13 instead.
How Will Bankruptcy Affect My Retirement Plans?
The good news is that for the most part, your 401(k) and other qualified retirement accounts are protected in bankruptcy. You don’t lose everything you own. Bankruptcy immunities can be used to secure property such as some equity in a home and your household belongings.
If you have funds saved in an IRA or Roth IRA, they are also generally exempt from creditors, but only up to a certain limit. This exempted amount is adjusted over time with the cost of living.
Can I Ease Medical Debts Through Bankruptcy?
If you qualify for Chapter 7 bankruptcy, your medical bills or healthcare related debt is wiped away. Your credit card debt, personal loans, and utility bills can also be discharged. But know that a mortgage, car payments, tax bills, and child support are generally non-dischargeable in a Chapter 7 bankruptcy.
If you do not qualify for Chapter 7 because you have the income to meet these obligations, you could consider Chapter 13. Under this type of bankruptcy, you pay back creditors, such as medical care providers, over time.
What If I’m Already Retired?
If you are acquiring income from your retirement accounts, that money is more exposed to creditors. But, it depends on how much income is needed to meet your living expenses.
For those who file Chapter 7 bankruptcy, any more than what you need to support yourself could be exposed to creditors. For those who file Chapter 13 bankruptcy, the income from your retirement plan(s) will probably be included in determining how much you can afford to repay your debt.
Is Bankruptcy the Right Move for Me?
Depending on your situation, bankruptcy could bring some relief from unpaid medical bills or credit card interest and late fees. If you feel like you are drowning in unsecured debt and lack enough income to handle monthly payments, bankruptcy could be a solution. On the other hand, bankruptcy isn’t necessary if you don’t have anything for creditors to gather — if they were to sue you and win.
We advise you to carefully consider your options and think about how declaring bankruptcy will affect your assets. Remember that retirement plans, such as your 401(k) plan or IRA, are typically fully exempt under federal law. To learn more about bankruptcy, exemptions, and whether it makes sense for you, get in touch with our bankruptcy lawyers.
Contact The Bankruptcy Lawyers At Groce & DeArmon, P.C.
Are you considering filing for bankruptcy? If so, it’s wise to protect your interests by meeting with a qualified bankruptcy lawyer. At Groce and DeArmon, P.C., we will help guide you through every step of the bankruptcy process to ensure that your situation is being handled effectively. For a free consultation, contact us online today or give us a call at (417) 862-3706.
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