Wednesday, July 23, 2014

Retirement and Bankruptcy

I have filed cases for older people who are simply ready to get rid of their debt and start moving forward with enjoying retirement. Obviously, you are better off if you plan for retirement. Many people have either not planned well or have had circumstances that have undermined their plans. This can include the accumulation of lots of debt. If this happens to you, bankruptcy may be a useful tool in retirement.

First, I strongly suggest consulting with a retirement planning expert. There are non-profits that offer such services as well as professional firms. No matter how hard you try, you will never know enough to make these decisions on your own. You need someone who specializes in retirement planning.

If your retirement planner sees that you have a lot of debt, he/she may recommend bankruptcy. Click here for an article on “What is Bankruptcy.”

Qualifying for Chapter 7

Our first consideration will be the question of whether you qualify for Chapter 7 or not. Most people would much rather go into Chapter 7 than any other chapter. If you don’t qualify for Chapter 7, then we will look at a Chapter 13, which is a longer and more expensive process.

To qualify for Chapter 7 bankruptcy, your last six-months of income must be below a certain threshold, unless over half your debt is “non-consumer debt” (in which case your income is irrelevant). The definition of non-consumer debt is extremely broad and even includes student loans. Your last six-months of income will depend on many factors as there is a long and complicated formula for determining this number and the threshold that applies to you. If you are over 65, you get a boost in qualifying. As part of my free consultation, I will give you a free legal opinion as to whether you qualify for Chapter 7. I promise not to pressure you to go forward after that.

So let’s say that you don’t qualify for Chapter 7. We still have plenty of options. First, since you are beginning retirement, we assume your income is about the drastically decrease. So that gives us the possibility of starting a Chapter 13 and later converting to a Chapter 7 when you qualify. Also, we are allowed to simply wait a few months until your last 6-months of income is below the threshold. These options will also give us more time to engage in pre-filing planning. Finally, there are several factors that we are allowed to take into account to bring your income number down and increase the threshold number—including whether you are over 65 or have financial dependents over the age of 65.

Protecting Your Assets

Our second consideration will be whether your assets will be protected in bankruptcy. If you read my essay on “What is Bankruptcy,” you saw that the court will appoint a trustee to manage your assets, with the goal of selling them to pay off creditors. However, we will not file bankruptcy for you unless we are sure that your assets are “exempt” or “excluded” from this selling-off process. The exemption process is one of the primary duties of a bankruptcy attorney.

Most retirement accounts, including most IRA’s, 401K’s, pensions, deferred compensation accounts, and other retirement assets are going to be protected (i.e., exempt from selling-off) up to a very high amount. Social Security income is exempt. For very wealthy retirees, you may run into a problem here, but most people will not.

Your House:

One big issue we see is in protecting a retiree’s house. Homes and real estate are not treated differently for retirees, relative to other classes of bankruptcy filers. However, as a practical matter, many retirees actually own their homes outright, with no liens or mortgages.

Fear not. The exemption for the value of your home is pretty high. If your home’s value is far above the exemption amount, then we still have options. Often, this would be a reason we would look at a Chapter 13, but we bankruptcy attorneys have to deal with this problem on a case-by-case basis.

How Will Filing Affect My Chances of Getting Accepted Into a Retirement Home?

If it is a facility that accepts Medicaid, they cannot discriminate on this basis. If they don’t accept Medicaid, they may discriminate on that basis. However, if you have a lot of debt, they probably were not going to take you anyways.

So here is what you should know. They will look at your debt-to-income ratio before anything else. The best thing to do in this case is file sooner rather than later. After you rid yourself of oppressive debt and get some time between your application to a retirement home and your bankruptcy filing, your chances will begin to go up significantly.

In Conclusion

If you are considering retirement and you have a lot of debt, you should definitely consider bankruptcy. You should first consult with a skilled retirement planner. Then, if he/she recommends it, come to me and we will see what your options are in bankruptcy. 

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