In this article, we discuss bankruptcy in retirement, how filing for bankruptcy after retirement affects your retirement accounts versus before retirement and what type of bankruptcy is right for retirees.
For many, the idea of filing for bankruptcy after retirement may sound absurd. The point of retirement is that you save enough money so you won’t have to work after a certain age. But not everyone has the ability to save enough money for retirement, and those that do retire don’t always have enough to last them until they pass on. Add in rising healthcare costs, tax rates, an increased number of parents and grandparents cosigning on loans for college, and the paltry amount guaranteed by social security, and you have the formula for bankruptcy in retirement. Filing for bankruptcy can help wipe out debt and free up more money for paying bills, however, it’s not always a good option for seniors.
Factors for Retirees to Consider Before Filing for Bankruptcy
- You don’t own much that can be taken in bankruptcy. In bankruptcy, creditors are only allowed to take certain things. For more detailed information check out our article on Illinois Bankruptcy Exemptions. Generally, creditors can’t take things that are necessary to be a functioning member of society, such as household goods, reasonably priced car, clothing, etc. They also can’t take your protected retirement accounts (until you pull the money out) or your Social Security funds. Many of these things make up a majority of what retirees and senior citizens own, so filing for bankruptcy isn’t always necessary.
- You have too many assets that you don’t want to lose. Maybe you have your first home and a second home mostly or completely paid off, or your source of income is protected under bankruptcy. If you file Chapter 7 bankruptcy you may risk losing one or both properties. Chapter 13 would result in a high monthly repayment in order to keep one or both of the properties.
- Don’t count on the homestead exemption in Illinois, but in Iowa you’re golden. Unless you just recently bought your house and don’t have much equity, the homestead exemption for bankruptcy cases in Illinois is capped at $15,000. That means if you have $200,000 in equity in your dwelling $175,000 is up for grabs by the creditors. Iowa exempts 100% of a debtor’s primary dwelling, regardless of the value.
Retirement Accounts and Bankruptcy: Filing Before Versus After Retirement.
Prior to retirement, the majority of retirement accounts are exempt from bankruptcy, and the amount in a given retirement account does not affect how Chapter 7 or Chapter 13 is calculated. However, if you have more than $1,362,800 in your IRAs combined any amount over that is fair game to creditors.
After retirement creditors will have a little more access to funds from your retirement accounts. It’s not that they can suddenly take whatever amount from your IRA, 401k, or pension that is necessary to satisfy your debt, but they do have access to some of the money you are pulling from those retirement accounts. Ultimately, it depends on how much you need to meet your living expenses. When filing Chapter 7, anything you bring in from your retirement accounts that is above what you need to survive can be taken, and for Chapter 13 your monthly income from your retirement accounts will be factored into your 3 to 5-year repayment plan.
Social Security Benefits are handled similarly to retirement income in bankruptcy. Creditors cannot simply seize your social security benefits, but once the money has hit your bank account it could be fair game. However, there is some protection as banks are required to know if an account contains federal benefit payments before allowing money to be garnished through bankruptcy. Furthermore, at least two months’ worth of benefits must remain in the account. The safest bet is to keep all social security payments in a separate account.
What is the Right Type of Bankruptcy in Retirement?
There is no one correct answer to this question, every person’s financial situation is different. However, there are a number of questions you can ask yourself if you’re retired and considering filing for bankruptcy.
- What kind of debt do you have? Can it be wiped out in Chapter 7 or is it exempt?
- How much of your property and other assets are exempt?
- What is your income level from your various retirement accounts? Is it low enough to qualify for Chapter 7 or will you need to file Chapter 13?
- After you determine how much you can “sell” through bankruptcy, will it be enough to satisfy your debts and be worth the hassle and side effects of bankruptcy?
- What is your level of medical and credit card debt?
- How much will your social security benefits factor into your monthly income? While your SSI is protected from creditors and not included in the bankruptcy means test, it must still be recorded as part of your monthly income, which, if too high versus your monthly expenses, might disqualify you for Chapter 7.
To learn more about the differences between chapter 13 and chapter 7 bankruptcy and which may be right for you read our article, When to File a Chapter 13 Bankruptcy VS Chapter 7 bankruptcy.
Can a Bankruptcy Attorney Help?
A good bankruptcy attorney can help you determine if 1) bankruptcy is the best option for your situation, 2) if so, what type of bankruptcy would be most beneficial and 3) if you can avoid bankruptcy altogether and find a more suitable alternative. They will also guide you through the bankruptcy process and make sure any forms you fill out are done correctly to maximize the benefits of bankruptcy. If you have questions about bankruptcy, don’t hesitate to give us a call at 630-324-6666.
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