Dispelling the Stigma of Bankruptcy
There may be times in your life when you might consider bankruptcy. Unfortunately, money troubles can happen to anyone at any stage of life, and the statistics back that up. In a 25 year period, from 1991-2016, percentages rose in the number of people filing bankruptcy between the ages of 55-64 (66%), and 65-74 (204%). The majority of bankruptcies filed however are by individuals younger than 65. No matter your age, bankruptcy constitutes a major life adjustment, and you may understandably have fears about the stability of your future, especially your retirement and 401(k).
This type of anxiety is not unfounded. The cultural stigma surrounding bankruptcy is that whether you file for Chapter 7 or Chapter 13, you are allowing creditors to dispossess you of everything from your home to your vehicles, to your family heirlooms. Perhaps you’ve heard about the lengths some have gone to absolve themselves of their debts — even to the point of withdrawing from their retirement fund in order to get out from underwater.
The increase in the aforementioned filing percentages could indicate multiple causes:
- Many people have been financially incapacitated by crises like recessions and economic downturns
- Medical emergencies, like the current global pandemic, have caused unprecedented financial hardship as people have had to deal with unexpected medical and funeral expenses.
- Unemployment rates have fluctuated, sometimes drastically, as the nation’s presidents come and go and leave their mark on domestic policy.
There could be another reason why bankruptcy filing percentages are trending upwards, and it isn’t necessarily a bad one: people are realizing the benefits of going through bankruptcy rather than spending years trying to overcome their debts in collections.
The Silver Lining
In the state of Utah, bankruptcy filings saw predictable swells in 2020 with the onset of the coronavirus pandemic. Crucial months like the start of the lockdown in March saw over 600 Chapter 7 filings, with spikes in bankruptcies coinciding with spikes in cases (the most critical month for reported COVID contractions in the summer, July, saw filings peaking at over 530). In the face of such numbers, it’s difficult to see any hope for individuals and families who already struggle with making ends meet. And yet, bankruptcy ultimately is about hope — the hope of moving on.
The first step to grasping that hope is in understanding exactly what bankruptcy entails, and the difference between Chapter 7 filings and Chapter 13. You don’t have to lose your 401(k). In fact, federal bankruptcy laws are designed to protect your retirement nest egg. Only you can choose to withdraw and use that money.
Bankruptcy Filings: The Straight Scoop
At the outset, it’s important to remember what bankruptcy is and what it is not.
- Bankruptcy is not an opportunity for creditors or the government, or anyone else to come and leave you bereft of all your possessions.
- It is not designed to be a form of indentured servitude from which you can never crawl back out.
- It is not a permanent mark on your standing within the community.
- Once you become bankrupt, you are not always bankrupt.
It may seem silly to belabor points like these, but so much of bankruptcy is surrounded in the fog of misunderstanding, that people who most need the time and the help don’t end up filing.
On the other hand, bankruptcy can be used as a tool to find relief.
- Bankruptcy is a way to get out from under the incessant stress of demanding creditors.
- Bankruptcy is all about finding a recovery plan that works.
- Bankruptcy is a chance to restart fresh.
Of course, circumstances have consequences, and bankruptcy isn’t objectively easy. But it is objectively easier than spending months and years watching your hard-earned assets be taken from you bit by bit by creditors. As was mentioned above, you don’t have to lose your 401(k) when you file for bankruptcy. Let’s see how that’s possible.
Chapter 7 Bankruptcy
Chapter 7 most likely resembles the type of bankruptcy of which people most commonly think. Chapter 7 bankruptcy starts by squaring your debt, wholly or partially, with your creditors. The trade-off is that the bankruptcy trustee will take whatever non-exempt property you have to cover the cost of the debt. That property will be sold. Exempt property is subject to certain value caps, but generally includes motor vehicles, jewelry, 401(k)s and pensions, and property attributed to your trade or profession. Non-exempt property can include family heirlooms, second vehicles or homes, and various financial holdings like stock, bonds, and cash.
It is imperative to remember that your 401(k) is considered exempt property, and can’t be touched by creditors. But that status is revoked the moment you use any of that money to pay off your debt. It will also be put under extra scrutiny if you attempt to save any of your non-exempt monies by making large donations to your pension before filing for bankruptcy. Not only could you lose exempt status on the whole thing, but you could be leveled with a fraud charge.
Chapter 13 Bankruptcy
Chapter 13 is much simpler. It allows you to keep your property, but you are placed on an extended payment plan that could last a certain number of years. While you won’t be able to make donations to your retirement while under Chapter 13 (all disposable income must go to paying off your debt), your property will be protected.
As you can see, both types of bankruptcy filings have measures in place to protect your essential property, of which your pension is deemed to be one.
What Do I Do Next?
If you are considering filing for bankruptcy in the state of Utah, especially Chapter 7 bankruptcy, it is highly recommended that you hire a competent attorney to guide you through this process. The attorneys at Rulon T. Burton & Associates have helped tens of thousands of families not only get out from under the weight of creditors but have helped them save hundreds of thousands of dollars.
If you feel the time is approaching to file for bankruptcy, then the time is now to start feeling the hope of a brighter future. The right attorney makes all the difference.