“Gray” bankruptcies are becoming more common. Is it a good idea?

We’ll have to give you a lawyer’s answer on this one: “It depends.” Some seniors have too many assets to make filing worthwhile, some have so few assets they’re uncollectable anyway, and some are either working like anyone else or have circumstances that make bankruptcy the right option.

You don’t have to do guesswork—if you live in this state, you can always call a New York bankruptcy lawyer—but it’s good to understand the various factors that go into the decision-making process.

How do assets impact a senior’s bankruptcy?

Seniors who live on very little may be “judgment-proof.” There are certain things that creditors can’t sue for.

Creditors may not take:

• Social security funds
• Pensions
• ERISA-protected retirement accounts
• Your car, unless you owe money to the auto lender

ERISA is the Employee Retirement Income Security Act. It protects employer-sponsored retirement plans. There is generally no cap on protected funds if they are in an ERISA plan. 

Traditional IRAs, Roth IRAs, and some 403(bs) are not always protected until you file bankruptcy. After that, the law protects up to $1 million. 

If you’re not sure whether your current retirement funds are in a judgment-proof account, speak to a bankruptcy lawyer who can make the evaluation for you.  If you are judgment-proof, there’s no good reason to file for bankruptcy. You can stop collection calls by using the Fair Debt Collection Practices Act to your advantage instead.

Seniors who have a great deal of assets are in the opposite situation. If they file Chapter 7, they stand to lose those assets as they’re distributed in bankruptcy. If they file Chapter 13, they may face a regular monthly payment that is higher than is comfortable. Nevertheless, Chapter 13 may offer an avenue for catching up on a mortgage or car loan before a repossession takes place. 

Assets include home equity, so you’ll need to work closely with a bankruptcy lawyer to determine what you can and can’t protect. 

Of course, if you’re still working and have only modest assets, then filing for bankruptcy might be the same for you as it would be for any other worker. During your free consultation, we’ll look at your total financial situation to help determine which situation is right for you.

Can bankruptcy take your Social Security check?

Social security benefits are exempt but are considered when conducting means testing. You’ll still need to report your social security income to the court. 

If you’re still earning income from any source, it’s a good idea to deposit your social security income into a separate account from your regular income. This will help avoid co-mingling, which can expose your social security funds to creditors and trustees.

Can you lose retirement accounts in bankruptcy?

Once you file bankruptcy, up to $1,512,350 in funds are exempt and protected. You must leave the funds in shielded accounts if you want to protect them. Once you withdraw money, the court considers that money to be an asset. 

If you are making regular withdrawals to meet your monthly obligations, you will need to speak to your bankruptcy lawyer to determine how those withdrawals will impact bankruptcy in your specific case. 

Get Help Today

Bankruptcy is nothing to be afraid of. If it’s right for you, it can bring the long-term financial relief that helps you enjoy your golden years.

Ready to review your finances and next steps? Contact us to schedule a free consultation today.