When a debtor has no alternative but to file for bankruptcy, they may get short-term relief from debt obligations, but the long-term effects are very real.
Seeking out bankruptcy protection will remain on your credit record for as long as 10 years, and affect your ability to obtain credit, such as facing increased interest rates or required security deposits.
Nondischargeable debts, such as property debt, tax debt, student loans, and spousal or child support, remain in play and must be paid.
However, these are examples of a bankruptcy’s impact on your immediate financial future. If these are the impacts bankruptcy can have in the present, what are the ways bankruptcy could impact your future?
Namely, your retirement.
While there are some negative impacts bankruptcy can have on your credit, there are also plenty of positives to consider. Not only are you faced with a new start, but you can also find complete relief of all dischargeable debts, the ability to hold some personal property and assets, like your home or vehicle, and relief from debt collectors.
Over time, you can even improve your credit score by removing these discharged debts from your credit history.
However, it is worth noting that bankruptcy can be a lengthy, stressful process, even with a bankruptcy lawyer at your side. Before you file, you should consider other options, such as working directly with your creditors to find an equally beneficial settlement.
You can also ask your creditors for deferments or extensions as you restructure your approach. Or, consolidate your debt into a solitary loan with a single payment.
All are viable approaches, but sometimes do not meet your needs when it comes to an increasing mountain of debt.
A key takeaway here is this. List your savings as exempt so they can remain protected as you continue working toward retirement.
The federal government has exemptions in place to protect debtors filing for bankruptcy, and while each state has varying exemption laws, a filer can use federal exemption regardless of state allowances.
There are a couple of variables to keep in mind.
Your retirement savings are protected up to about $1 million dollars and your retirement savings must be part of a retirement plan, such as an IRA, pension, or 401(k).
Social security payments fall under federal protections, but they must be identifiable from the rest of your finances since the rest of your finances are usually involved in bankruptcy.
If you keep them separate from the rest of your income, those earnings should remain untouched.
Since wages are not garnished when you file for bankruptcy and you have eliminated your dischargeable debt, you have more wiggle room to focus on your retirement while you recover from the filing process.
A knee-jerk reaction may be to start investing more aggressively now that you have freed yourself from your debt. But this can actually be extremely risky. So make sure you go in with an advisor you trust and play it safe.
Increasing your income is also a great way to start saving more for retirement after a bankruptcy. You could request a raise or a new position, or even work with another company in your field of interest. Why not turn that hobby or trade of yours into something you can monetize?
Even just working part-time to supplement your monthly income can make a world of difference towards your retirement.
Most importantly, do not lose sight of those retirement goals! Filing for bankruptcy can make you feel powerless. But just because your credit takes the hit, does not mean that your retirement will.
Use this new start you have given yourself to learn new lessons and keep feeding your retirement. Bankruptcy and retirement can work out just fine. You are protected and you do have options, so keep your eyes on the horizon while you put the work in today.
If you’re dealing with the potential of bankruptcy, give us a call. Our team will work to help you by reviewing all of the options our firm has available. We will ensure you’ll get the best possible outcome for your situation.
Get in touch today so we can start working on either halting bankruptcies or preventing them from taking place altogether!
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