Bankruptcy may not be on the mind of most retirees, but for those retirees with excessive debt, bankruptcy can help to remove the stress of crushing debt while still allowing them to live somewhat comfortably. Before filing for bankruptcy, however, it's important that retirees know the three things below.
1. Know How to Protect Your Social Security Payments
While creditors cannot legally garnish your Social Security payments, they are allowed to garnish your bank account. This can lead to an accidental freezing of your Social Security payments and can cause money flow issues.
So, what can you do to protect your Social Security payments from garnishment? Funnily enough, the answer is to have your Social Security payments directly deposited into your account. When a bank receives a garnishment order from a creditor, it's their job to look at your available balance and determine whether there are protected funds in there. When your Social Security payment is direct deposit, your bank will know exactly what those funds are and can protect them. If you have your payments sent to you as a check and deposit the money yourself, the bank won't know where they're from and they could be garnished accidentally.
2. Know Which Retirement Funds are Exempt
Fortunately for retirees filing for bankruptcy, the majority of retirement funds, including 401(k)s, are exempt from garnishment. Other plans, however, such as IRAs, aren't exempt, but they're protected.
When it comes to retirement funds, those that remain in the fund are exempt from garnishment. Once your funds begin being paid to you as income, however, creditors may be able to put some of those funds towards your debts, as long as you have enough to support you. With IRAs, your exemption will only apply up to $1,245,475 per person, so if there is any more than this in your IRA account, it could be used to pay your creditors.
3. Know Which Bankruptcy Chapter Is Right For You
Whether you're a millennial or a baby boomer, it's vital that you know which bankruptcy chapter is best for you. An experienced bankruptcy attorney or financial advisor can give you the information you need to make this decision.
When working with an attorney or financial advisor, you'll be asked what kinds of debts you have. Certain debts, such as alimony and IRS payments, cannot be discharged during a chapter 7 filing. This means that you'll still be responsible for them. If you owe such debts, chapter 13 may be best. Chapter 13 allows you the chance to pay back your debts, but it takes your available income into account. When you file chapter 13 bankruptcy, you don't have to worry about not being able to pay rent or buy groceries, because these expenses will be considered necessary for your survival. Chapter 13 can be a great option for those in retirement, as creditors will no longer be breathing down your neck but you can be sure you'll have enough to survive on.
To learn more about filing bankruptcy during retirement and how doing so could affect you, consult with an experienced bankruptcy attorney, such as Spear & Blackburn PSC Atty, or financial advisor immediately.