When you are young, it is easy to make a habit of revolving credit lines. As you get older, however, the debt you maintain should be lower, since you want to be able to pay it off prior to retirement.
Unfortunately, life happens. There's a chance that you lost your job earlier than expected or had a medical emergency that added to your financial stress. Whatever the situation is, if you are in over your head with debt, bankruptcy may offer needed relief.
Filing for bankruptcy comes with the protection of the automatic stay and stops creditor harassment. It can be a good way to eliminate debts before or during early retirement.
You can choose between Chapter 7 or 13 bankruptcy. An analysis of circumstances is needed to determine which you might qualify for. A means test is one step to qualify for Chapter 7 bankruptcy. If you don't meet it, then Chapter 13 and a repayment plan is an alternative.
Are your retirement assets protected in bankruptcy?
One good piece of news is that there are many exemptions that can help protect your retirement and assets during bankruptcy. Some of the types of things you can generally exempt from the bankruptcy include work-related equipment, clothing, vehicles and certain kinds of property. There is a homestead exemption, too.
Retirement accounts are normally left alone during bankruptcy. This means that it can be a mistake to take early withdrawals (with the penalties and taxes) to pay off credit card or medical debts. Assets like your 401(k), profit-sharing plans, 403(b) accounts and pensions are generally exempt. Even your Roth IRA has an exemption, but check the limit, as it may have changed.
Seniors may also be able to exempt certain kinds of income at the state level. For example, you may be able to exempt disability or illness benefits, veteran's benefits, alimony, public assistance, life insurance payments and other kinds of income.
Deciding if bankruptcy is right for you isn't always easy, so sit down with an attorney and discuss how bankruptcy might affect your situation. You could find that the bankruptcy has little effect on your day-to-day life but relieves you of overwhelming debt. You may also find that there are alternatives better suited to your situation.
Think carefully before choosing bankruptcy, but remember that many of your retirement assets will remain protected.