Filing for bankruptcy is an option you might consider if you are in debt and can no longer pay your creditors. Bankruptcy is becoming an increasingly popular option among retirees, but there are a few things you’ll want to know before deciding if bankruptcy is your best course of action.
Consider these aspects:
- Look into other options, such as negotiating with your creditors. You might be able to settle a debt for a fraction of what you owe and make low monthly payments without having to go through the bankruptcy process.
- Calculate what your income is. Your income will determine if you qualify for Chapter 7 or Chapter 13 bankruptcy. Income qualifications vary from one state to another, however, so it’s important to check the requirements for your state.
- Ensure your debts will be erased if you file for bankruptcy. Debts can be secured or unsecured, and some types of secured debts won’t go away when you file.
What is Chapter 7 bankruptcy?
Chapter 7 erases any unsecured debt, which includes medical bills as well as credit card debt. Your income has to be below a certain level for you to qualify for this type of bankruptcy and this level varies from one state to another.
The downside of filing for Chapter 7 is that your assets will be sold to pay your creditors back. Your creditors will not be paid back if there are no assets to sell.
What is Chapter 13 bankruptcy?
Chapter 13 bankruptcy includes setting up a restructuration plan, usually with monthly payments. Filing for this type of bankruptcy means that you’ll have pay at least a portion of your debt.
The main advantage of Chapter 13 is that your assets won’t be sold. However, you’ll have to prove that your income allows you to keep up with the repayment plan after subtracting your living expenses. Your secured debts also have to be below a certain level in order to qualify for Chapter 13.
What kind of assets could you lose if you file under Chapter 7?
The money that is in your retirement funds or in your pension is protected, but there are limitations. For instance, having more than a certain amount saved up in a Roth IRA plan could mean that a portion of your savings could go towards your creditors. The equity you own in your home is also exempt as long as it doesn’t exceed a certain amount.
These limits vary from one state to another. A bankruptcy attorney can help you figure out which assets could be at risk if you filed for bankruptcy.
Another option is to remain judgment-proof, which is something most retirees can do. Your creditors will not be likely to take legal action against you if they know that you don’t have an income and won’t start receiving one.
If paying your debts is a challenge, let your creditors know about your financial situation and they might decide that taking legal action wouldn’t be worth it if you don’t have an income that could be collected. Otherwise, negotiating to reduce your debts or filing for bankruptcy could bring you the debt relief you seek.