Whether you are saving for retirement or already retired, debt can put your savings at risk. These days, more and more seniors are turning to bankruptcy. In fact, seniors are the fastest growing segment of bankruptcy filers in the U.S, according to a 2010 study by law professor John Pottow at the University of Michigan. Pottow analyzed decades of bankruptcy data and found the number of bankruptcy filers age 65 and over doubled from 2.1% in 1991 to 4.5% in 2001, then jumped to 7% in 2007. This may seem to make sense when you consider the rising cost of healthcare expenses, but in fact the real culprit behind this rising tide of bankruptcy is not medical debt but credit card debt.
So what happens to your retirement funds in bankruptcy before you retire? How about during retirement? Is your Social Security at risk? Does bankruptcy even make sense for seniors? Here are the answers to five common questions about retirement in bankruptcy.
1. Will filing bankruptcy affect my retirement funds?
Probably not. Regardless of how much you have saved in your 401(k), 403(b), 457(b), Keogh or other profit-sharing or defined benefit plan, the money in these retirement accounts can not be touched by creditors if you file Chapter 7 bankruptcy, nor will they affect the amount you pay back when filing Chapter 13 bankruptcy. If you have funds saved in an IRA, Roth IRA, SEP IRA or SIMPLE IRA, the funds are also generally exempt from creditors, but up to a certain limit. As of April 2013, this limit was $1.2 million (or $1,242,475, to be exact). It adjusts over time with the cost of living.
2. What if I am already in retirement and taking distributions?
If you are taking income from your retirement accounts, that money is more accessible to creditors. But it depends on how much income you need to meet your living expenses. For individuals who file Chapter 7 bankruptcy, anything above what you need to support yourself could be fair game to creditors. For those who file Chapter 13 bankruptcy, the income from your retirement plan or plans will likely be included in determining how much you can afford to repay your debt.
3. Can creditors get to my Social Security income?
Technically, Social Security and disability income is protected under federal law from being garnished by creditors. Once the money hits your bank account, however, the money is susceptible to potential garnishment. The good news is that, under a 2011 rule, banks must know whether federal benefits are included in an account before garnishing the assets within. If Social Security or similar government benefits are included, two months’ worth of benefits are protected from garnishment. Some individuals play it safe by holding Social Security income in a separate account so it is clear that the assets are separate from others.
4. Can I relieve medical debts through bankruptcy?
Yes, if you qualify for Chapter 7 bankruptcy, your medical bills or healthcare related debt is counted among the types of debt that can be discharged (in other words: completely wiped away). Credit card debt, personal loans, utility bills, attorney fees and some court judgments can also be discharged. Mortgage, car payments, tax liens and other tax bills, child support, and most student loan debt are bills that are generally non-dischargeable in a Chapter 7 bankruptcy. If you do not qualify for Chapter 7 because you have the income to meet these obligations, you could consider Chapter 13. Under this type of bankruptcy, you create a pay back creditors, including medical providers, over time.
5. Is bankruptcy a good idea for seniors?
That depends on your situation. If you are drowning in unpaid medical bills or credit card interest and late fees, bankruptcy could offer some relief. However, some seniors may be considered “judgment proof,” which means that you simply do not have anything for creditors to collect if they sue you and win. If this is your case, a bankruptcy may be unnecessary. Find out more about bankruptcy and whether it makes sense for you.
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