Is It Better To File For Bankruptcy Or Use Retirement Savings To Pay Your Debts?
When You Declare Bankruptcy in Chandler or Gilbert, Arizona, There Are Limits in How Much Equity You Can Hold in Every Type of Asset. Our Chandler Bankruptcy Lawyers Discuss If Your Retirement Savings are Protected in Bankruptcy, and Whether It’s Better to File or Use Retirement Savings to Pay Your Debts.
Sometimes bankruptcy happens to people who are young and inexperienced in financial matters. Other times, it happens to someone who has been working for several years and amassed a sizable retirement account, but fell upon hard times. If the latter is true for you, you may be wondering whether it is better to pay your debts with your retirement savings, or if you should file for bankruptcy. Bankruptcy may be able to help you with your debt situation without depleting your retirement savings. Other options may be available to you based on your specific circumstances. Therefore, please contact our Arizona bankruptcy firm at 480-833-8000 to find out more.
Bankruptcy & Asset Protection
There are two main types of bankruptcy that most people file. Chapter 7 bankruptcy (A Liquidation bankruptcy) or Chapter 13 (A Wage Earner’s Bankruptcy). Chapter 7 bankruptcy in Chandler discharges unsecured non-priority debts, while Chapter 13 pays off secured and priority debts (and sometimes discharges unsecured debts) in a payment plan that lasts three or five years. Because your debts are, for the most part, being paid off in a Chapter 13, the trustee won’t be so concerned about your assets’ values. But because debts are wiped away in a Chapter 7 bankruptcy, the court wants to make sure that you don’t have luxury items that could be sold to pay your debts. That is why, in a Chapter 7 bankruptcy, all your assets must be protected by state exemptions.
Arizona does not allow for the use of federal exemptions in a Chapter 7 bankruptcy. Arizona also doesn’t offer a wildcard exemption to be used on an asset of the debtor’s choosing, so it is a fairly strict state when it comes to what is exempt in a Chapter 7 bankruptcy. Some of the more common exemptions include the $150,000 homestead exemption, the $6,000 exemption for household goods and furnishings, and the motor vehicle exemption, which is $6,000 for an individual or $12,000 for a married couple. Arizona even has a strict and inconvenient exemption for cash on hand/in bank accounts on the day you file- $300 for an individual and $600 for a married couple. So you may be concerned if there is an exemption that can be applied to your retirement savings.
Is My Retirement Protected In Bankruptcy?
Almost all types of retirement savings accounts are safe in bankruptcy. Exemptions apply to protect retirement accounts of all types in every state. This includes 401(k)’s, money purchase plans, profit sharing plans, 403(b)’s, Keoghs, and IRA’s. The bankruptcy court has no interest in leaving you penniless as a retired senior citizen. That’s why your retirement accounts are exempt, no matter whether you file Chapter 7 or Chapter 13. So if your pension and retirement accounts are the reason you’re hesitant to file bankruptcy, you can rest assured knowing that your bankruptcy trustee will not seize your retirement savings. Bankruptcy will also not take away your ability to receive your pension when you retire.
Should I Withdraw From My Retirement Savings To Avoid Bankruptcy?
If you have significant retirement savings, you may be wondering whether it’s worth it to withdraw from those accounts to avoid the need to file for bankruptcy. We don’t generally recommend withdrawing from your retirement savings to pay unsecured debts because you will face taxes and penalties when withdrawing from your retirement accounts. Many of these accounts give penalties when withdrawn before a certain age, such as 59. These penalties can equate to about 40% of whatever you withdraw from your retirement accounts. Sometimes, it can be worth it in a one time emergency situation to use your 401(k) or other retirement savings to get out of a sticky situation. But with how much you will be penalized for withdrawing from your retirement accounts, this could be like throwing a cup of water at a raging house fire. It will also leave you without vital income during your retirement. If you deplete your retirement savings now, you may not have enough time to compensate for that before you retire.
The Downsides Of Declaring Bankruptcy In Chandler, AZ
While there are penalties for early withdrawals from your retirement accounts, it’s unrealistic to pretend that there are no downsides that come with filing bankruptcy. Knowing about them in advance helps you avoid a huge shock when you face negative consequences of filing bankruptcy later in the future. Only you can decide whether these downsides outweigh the benefits of filing bankruptcy. Some of the downsides of filing bankruptcy in Chandler include:
- You will be excluded from FHA mortgages for 2 years after your date of filing.
- Your credit cards will be frozen. Therefore, you won’t be able to use them during your bankruptcy and you will need to apply for new ones after your case is discharged.
- A Chandler bankruptcy filing could leave your cosigners in the lurch, if you have them.
- You will be ineligible from discharging your debts in bankruptcy again for a certain number of years.
- Bankruptcy proceedings are public, and a Chapter 7 bankruptcy will remain on your credit report for 10 years, and a Chapter 13 bankruptcy will remain for 7 years.
- A bankruptcy filing could make it difficult to find employment in certain professions, such as a financial advisor.
- You don’t get to pick and choose which debts are discharged in your bankruptcy, including debts to your friends and family members.
- Some of your debts might not be dischargeable in bankruptcy.
- Filing bankruptcy is complicated, can be expensive, and you will face severe consequences if there are mistakes in your case.
Our Arizona Bankruptcy Lawyers Will Help You With Your Decision
While bankruptcy offers tremendous benefits that aren’t possible when withdrawing from your retirement savings, we know it isn’t always the best choice for everyone. You may also have forms of debt relief besides retirement withdrawals and bankruptcy available to you. Our bankruptcy lawyers will give you an honest opinion, not the one that will put the most money in our pockets.
We don’t just encourage clients to pick bankruptcy over withdrawing from pensions and retirement funds just because it gets us more cases. Filing bankruptcy can help clear you of unsecured debts like credit cards, repossession deficiencies, medical bills, and personal loans. You might be able to utilize the automatic stay to stop a home foreclosure, wage garnishment, or vehicle repossession. Bankruptcy can also help you catch up on secured debts, or debts that can’t be wiped away by bankruptcy, like child support and student debt. Bankruptcy could finally be your opportunity to get your creditors off your back and start over with a clean slate.
Contact Our Chandler Bankruptcy Lawyers Team In Arizona
Our Chandler bankruptcy team has collective decades of experience that helps us efficiently achieve the best possible outcomes for our clients. We can help you discharge your debts in bankruptcy without losing your retirement savings. We also offer low-priced, POST-FILING payment plan options that make getting your case filed more affordable. To get started, call us or use our online form to request your free consultation today.
1731 West Baseline Road #101
Mesa, Arizona 85202