If you're retired and carrying debts you need to read this article
What You Should Know About Declaring Bankruptcy In Retirement
by Gary Foreman
For the vast majority of us retiring means that our income will be reduced. If you're carrying debt, that can become a problem. And for many retirees declaring bankruptcy in retirement will become a real possibility.
According to The Center for a Secure Retirement: "Three in 10 (28%) middle-income Boomers say that they devote more than 40% of their monthly income to debt."
To help us understand some of the ins and outs of declaring bankruptcy after you retire we turned to Chris Cyndecki. Mr. Cyndecki is a Certified Financial Planner® and works with The Pioneer Wealth Management Group in Austin and Dallas Texas.
Q: Some retirees run into debt problems. Is it wise to withdraw money from their retirement accounts (like IRAs, 401Ks, etc.) to pay off their debts?
Mr. Cyndecki: If the debt burden seems overwhelming, and you are considering bankruptcy, we strongly recommend speaking with a qualified bankruptcy attorney in your state before taking any money out of retirement accounts. Many retirement accounts are protected from creditors during bankruptcy proceedings.
Using retirement funds to pay off debt could make sense in certain cases. However, this depends on the amount of debt, interest rate, account balances, tax situation, and several other factors.
Q: Are there other options to consider before exploring bankruptcy?
Mr. Cyndecki: Creditors know that debt will be discharged in the event of a bankruptcy. As a result, they are usually willing to negotiate a payment plan.
Q: You recommend that anyone considering bankruptcy in retirement consult an attorney trained in bankruptcy. Why is that?
Mr. Cyndecki: A qualified bankruptcy attorney will know the specific bankruptcy laws pertaining to your state. In many states, bankruptcy laws favor the borrower. In Texas and Florida, there is an unlimited homestead exemption, allowing you to keep all of the equity in your home. The attorney should know the best course of action to take in your specific situation.
Q: What should retirees know about bankruptcy if they're considering it as an option to solve their debt problem?
Mr. Cyndecki: There are two main types of bankruptcy: Chapter 13 and Chapter 7. Chapter 13 is a reorganization bankruptcy designed to pay back debts through a repayment plan. Chapter 7 is a liquidation bankruptcy which eliminates unsecured debts. If you have other income sources (such as a pension) you may be ineligible for Chapter 7 bankruptcy.
Federal law protects assets within retirement accounts. The Employee Retirement Income Security Act (ERISA) of 1974 and the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 provide federal protections to many accounts including: 401(k)s, 403(b)s, IRA's, Roth IRA's, SEP-IRA's, and SIMPLE IRA's.
The equity in your home may be protected, and you may not have to sell your house. This depends on the laws in your state of residence.
Banks are required to protect two months of Social Security benefit payments from garnishment by creditors.
Q: Is it possible to get credit after bankruptcy? What if a retiree needs a loan for a newer car or to buy a smaller home?
Mr. Cyndecki: Obtaining a traditional bank loan after bankruptcy will be particularly difficult. Traditional lenders qualify borrowers on the basis of debt to income ratios and credit scores. Financial assets within 401(k)s and IRAs can be used to qualify for a Freddie Mac mortgage in limited situations. Alternative lending options may be a solution, however these loans usually come with substantially high interest rates.
Q: Is there anything about bankruptcy that effects retirees differently than younger people? Or is it pretty much the same for everyone?
Mr. Cyndecki: There is a psychological impact associated with filing for bankruptcy. Many people may feel ashamed with being unable to meet their debt obligations. Younger individuals may see bankruptcy as an opportunity to start fresh and form better habits in the future. Retirees may not have that same opportunity.
Reviewed November 2017
Take the Next Step:
- Find out: Could debts ruin your retirement?
- Am I a good candidate for bankruptcy?
- Understand what the future may have in store for you if you decide not to do anything about your debt.
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Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter. Gary is also available for audio, video or print interviews. For more info see his media page.
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