If you, like so many Americans right now, are struggling with job loss or other financial stressors, you may be considering the prospect of bankruptcy. While bankruptcy may be an option of last resort, many Americans think that they can avoid bankruptcy by cannibalizing their retirement accounts or making other moves that simply forestall the inevitable.
In the current economic climate, bankruptcies are to be expected. Congress is attempting to stem the tsunami of bankruptcies that will clog up the American courts, but no one knows whether the funds extending unemployment and stimulus checks will be there a few months down the road. This has many Americans worriedly looking over their finances and planning financial moves for their future.
While planning for the future is generally a good thing, you don’t have to rob the future to pay the present. In this article, we’ll discuss what you should and should not do if you are one of the nearly 40 million Americans who are unemployed right now.
Talk to a Bankruptcy Lawyer Now
Even if there’s a chance that you aren’t heading toward bankruptcy, the financial advice that bankruptcy lawyers provide is much different than the type of advice credit counselors or financial planners provide. We can tell you how to divest your liabilities while hanging onto your assets. In other words, we can help leave you in a better financial position than you were before you entered bankruptcy.
Of course, there’s a caveat to that. Your credit could take a hit. This is one of the several factors that bankruptcy attorneys will discuss with you when you meet with them. The best thing about many bankruptcy attorneys (and in particular Butcher Law Office, LLC) is that they provide you with a free hour-long consultation. There is no need to file for bankruptcy or commit to settling your debts in that manner. So getting a free consultation and listening to what we have to say may provide you with a firmer foundation to make your next move. That doesn’t mean that you should rush to file for bankruptcy. But knowing all of your options helps you make a more informed decision.
Do Not Touch Your Retirement Savings!
Your retirement savings are protected under bankruptcy law. In other words, creditors cannot usually use that money to recover some of the debts you owe.
Unfortunately, many Americans are raiding their retirement savings right now. Why? Because the federal government is allowing Americans to borrow from their retirement accounts while minimizing certain penalties. The money withdrawn is taxable, and can be repaid within a three-year period without incurring a tax liability. But most prognostications find that Americans who borrow from their retirement savings now will not be able to pay them back in the future. That money will just be gone.
A Chapter 7 bankruptcy filer can protect IRAs and 401(k)s using Chapter 7 exemptions. The amount of money you can protect in the account may be capped in certain cases, but chances are good that you will be able to protect all the money in the account. So if you use that money to pay debts you can discharge in Chapter 7, you are taking a double loss.
Don’t mortgage your future by using your retirement funds to pay off debts that can be erased in bankruptcy!
Roth IRAs and Bankruptcy
Because retirement accounts offer broad scale protection from bankruptcy, they can be useful for protecting assets. Yet many frugal-minded Americans will simply let cash pile up in their bank accounts as a buffer for bills and other debts that are piling up.
You shouldn’t do that. Firstly, you can only protect so much money in Chapter 7 and that includes savings and checking accounts. The more money that you protect in your bank accounts, the less money you have to protect other assets.
Similarly, if a creditor files a lawsuit against you to recover a debt and wins the judgment, the creditors can levy these bank accounts to recover the debt. They cannot, however, levy a Roth IRA.
There are certain precautions to be taken in using a Roth IRA to help protect assets, however. An experienced bankruptcy lawyer can discuss using a Roth IRA to help protect a set amount of money in the context of bankruptcy.
Don’t Liquidate Your Assets (Yet)
Most folks, when they meet financial turmoil, will find assets they can sell off to stabilize their situation. This may work in the short term, but if the situation doesn’t change, you can find yourself without any assets, still making payments on those same debts.
If you’re considering bankruptcy, then the bankruptcy trustee through the court could void asset transfers that occurred recently for which you did not receive equal or fair market value as exchange. This is especially true if the court thinks you’re moving these assets simply for the purpose of protecting them. That would be considered fraud.
So before you start divesting yourself of valuable assets, discuss the matter with a bankruptcy attorney.
Forbearance Options Can Help
Federally-backed mortgages now qualify for forbearance. This means that you won’t incur a penalty for not paying on your mortgage, at least for now. What it really means is that lenders can’t foreclose on your home during this time. That could change in several months when the legislation protecting borrowers expires and they find themselves in a position of owing several months’ worth of mortgage payments. Lenders may likely offer options to roll arrearages into a current monthly payment ideally.
If lenders will not work with you after the forbearance, there is always the possibility of filing a Chapter 13 bankruptcy — to catch up on the missed mortgage payments over a 5 year period.
Schedule a Free Consultation with a Eugene, OR Bankruptcy Lawyer Today
Talking to a bankruptcy attorney about your options heading into the coming months is a wise idea if for no other reason than we can help you make a smarter and better informed decision. Call Butcher Law Office, LLC today to schedule your free consultation with Tom.