Should you file for bankruptcy to clear your debts?




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Has the pandemic put you in so much debt that you wonder if you should file for bankruptcy? If so, it’s not surprising. In the wake of coronavirus-related business closings and job losses, personal bankruptcy filings have increased this year, with nearly 80,000 Americans hoping to write off some or all of their debts.

The jump could portend a continuing wave of filings, including among people over 65 – who in the years leading up to the pandemic had been the fastest growing age group of bankrupt filers. . The combination of high medical bills, limited retirement income and the lack of guaranteed pensions makes this trend likely to continue, says Robert Lawless, professor of law at the University of Illinois. “The COVID epidemic has not made things better,” he says.

But the fresh start made possible by bankruptcy is not the walk in the park that some lawyer advertisements would have you believe. And this has implications for older Americans that may surprise you. Here’s what you need to know.

Two paths to take

If a person seeks bankruptcy protection, it is usually under one of two sections, or chapters, of US bankruptcy laws. Most individual deposits go through Chapter 7, which clears out debt, often to the detriment of your home and non-retirement assets. You will typically pay between $ 1,000 and $ 2,000 including legal fees to file, and can only file if your income falls below certain limits, such as the median income of a household of the same size in your area. state. Chapter 13 could cost three times as much, and it only clears your remaining debt after you execute a three to five year payment plan without any missed payments or mistakes. You’ll need to use your income, including withdrawals from your retirement account, to pay off your debts, but Chapter 13 will usually protect your home. To help you make a decision to file or not, you can find a specialist in your own state through the National Association of Consumer Bankruptcy Lawyers and request a free consultation.

How the deposit can help you

It can save your retirement. The deposit can wipe out credit card balances, medical bills, and other debt, giving you more chances to save for retirement and more protection for what you’ve already saved. While pensions, 401 (k), and recent Social Security benefits are protected from creditors even if you don’t file a case, bankruptcy adds protection of up to $ 1.36 million in IRAs, which are not always prohibited for creditors in all states.

Filing for bankruptcy is often the first step towards a better credit rating. Even though a bankruptcy filing will stay on your credit report for seven or 10 years (where it could be held against you if you apply for a job or try to rent an apartment), “It’s not the end of the world, “says Jenny Doling, a bankrupt lawyer in Palm Desert, Calif.” You can build credit pretty quickly. “(This isn’t always good news, however, see below.)

You may be able to leave more money in your retirement accounts to your heirs if your debt is discharged through a bankruptcy filing. Otherwise, the creditors – not your heirs – would get the first dibs on your estate money.

And bankruptcy can bring peace of mind. Filers usually start to feel embarrassed no matter how often they are reassured that this is a business decision and that there is no shame in going through hard times. But then comes relief, say bankruptcy attorneys who have seen this pattern repeatedly – relief from both debt collectors and the anxiety that often accompanies crushing debt. As Lawless says, “Getting the phone to stop ringing is more important than a lot of people realize. “


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