Debt can overwhelm you at any age or stage of life. If you lose your job, have unexpected medical costs, go through a divorce or experience any other major life event that drives income down and expenses up, you can find yourself in a tight spot. And the older you are when it happens, the worse off you will be. Why? You're usually not in a position where your income will be increasing. Especially if you're retired, your income may be fixed, so you won't have a way to make up the difference. So what can you do? Smart North Carolina seniors will consider bankruptcy.
How bankruptcy protects your retirement assets
A Chapter 7 bankruptcy will relieve most unsecured debts including credit cards, medical bills and past due taxes that were filed on time and have been outstanding for at least two years. Your social security income is exempt from the bankruptcy so creditors can't access it (so long as you keep it in an account separate from other non-exempt income).
For instance, if you have a part-time job and have that pay direct deposited into the same bank account as your SSI payments, they won't be protected. Before you file bankruptcy, move your SSI deposits to a separate account. If you receive other pension payments, like from a 401(k), Roth IRA or employer pension plan, make sure those are also sent to a different account than your earned income.
Essentially, your creditors will only be able to access your earned income and, if it's below a certain threshold, that will also be off limits. Your home's equity will be protected to a great extent as well. If you are married and file bankruptcy together, in NC you can shield $70,000 of equity. If you are over 65 and your spouse is deceased, you can protect $60,000 of home equity.
How bankruptcy allows you to catch your breath
Bankruptcy gives you a financial reset. If you or your spouse had an accident or serious illness that left you with tens of thousands of dollars of medical bills you can't afford, you might not know what to do. On a fixed income, a spike in debt can feel like a financial death sentence but it doesn't have to be. Bankruptcy can help.
You can also consider a Chapter 13 bankruptcy that allows you up to five years to catch up on past-due balances, then discharges remaining unsecured balances. But a Chapter 13 is really better for a current wage earner than a retiree. However, if you have more equity in your home than you can protect, you may want to discuss with your lawyer whether a Chapter 13 is preferable.
Chapter 13 is usually for those who need to catch up on payments on secured debt. For instance, if you still have a mortgage and fell behind on your payments, it can be advantageous, particularly if you would lose significant equity if the home went into foreclosure. However, a short sale may work out better for you financially. An expert attorney can advise you.
Getting past the stigma of bankruptcy
Many seniors reject the idea of bankruptcy because they see it as a sign of failure, or they worry that people will know and think worse of them. First, while bankruptcy is a matter of public record, most people won't know unless you tell them because the bankruptcy rolls aren't published by the court. Some newspapers may publish local business bankruptcies, but typically don't mention personal ones.
Second, bankruptcy is not a sign of failure – it's a sign that you're making the best choice for your financial future. Wallowing in unmanageable debt doesn't do you, your family, or the economy any favors. Plus, you've worked hard all your life, and you deserve peace of mind in your golden years. Don't let excessive debt consume your retirement.
And one final thing to consider is, if you deplete your retirement funds to deal with this pile of debt, you may find yourself in a hard way in a few years if you run short on money and can no longer work. Take a conservative approach now, don't drain your retirement fund to pay medical bills (or whatever debt you're in over your head with) and look to bankruptcy instead.
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