With the economy continuing its slow recovery, research data suggests that seniors are filing bankruptcy in higher numbers than ever before. According to a recent article from TheStreet.com, approximately 25.3 percent of all bankruptcies filed in 2011 involved individuals who were aged 55 or older. The cause? Living expenses, including medical expenses, are increasing while their income is decreasing. Even though government programs like Social Security and Medicare are intended to bridge the gap, seniors often find themselves coming up short and racking up debt as a result.
Healthcare costs are just one of the reasons that seniors are filing bankruptcy in increasing numbers. Student loan debt also continues to haunt many retirees. A study published earlier this year by the Federal Reserve Bank of New York found that 6.8 million Americans age 50 or older accounted for almost a fifth of all student loan borrowers, totaling nearly $36 billion in debt.
A recent profile of several seniors who are pursuing college degrees demonstrates the extent of the student loan problem. One of the subjects, 57-year-old Denise "Dee" Moy, was lucky enough to land a job in her chosen field but the diploma she’s working on completing comes with a $70,000 price tag. Her greatest fear? That her student loans will prevent her from ever being able to retire.
Why Borrowing From Your Retirement is a Bad Idea
While the market has continued to improve, many seniors have seen their retirement savings dwindle. Compared to the returns they’re getting on their investments, using retirement money to get rid of those unpaid medical bills or lingering credit card balances may seem like good financial sense. While taking out a loan from your 401(k) or borrowing from your IRA can wipe out debts faster, filing bankruptcy may actually be the better choice. Here are just a few reasons why you should think twice before using your retirement savings to pay off debt.
- Paying down debt with your retirement savings drains your nest egg. Retirement plans are intended to be used for long-term savings. When you take funds out of your retirement, you’re losing out on all future earnings on the money. Even if you pay the money back to your account, you’re still essentially short-changing yourself and your future in the long run. The older you are, the harder it will be to make up the difference, even if you’re still working. With certain types of retirement accounts, such as a traditional IRA, you’re not able to make additional contributions once you reach a certain age.
- You may have to pay taxes on the money you withdraw. You may think that borrowing money from yourself wouldn’t create any additional tax liability but you’d be wrong. That’s because early withdrawals from retirement accounts may be treated as taxable income by the IRS if you’re under age 59 1/2. Early withdrawals may also be subject to an additional 10% tax penalty. If you take out a 401(k) loan and you can’t pay the money back, not only have you depleted your retirement savings but you’ve also put yourself on the hook for a hefty tax bill.
- Retirement loans can’t be discharged in bankruptcy. When you borrow from a 401(k) plan, you’re essentially borrowing money from yourself. Since you’re acting as both creditor and debtor, you can’t include this type of obligation in a Chapter 7 bankruptcy filing. You could file for Chapter 13 bankruptcy protection instead if you need more time to pay the money back, but it won’t discharge the loan.
Filing Bankruptcy Safeguards Your Retirement
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, your creditors can’t come after money in your IRA, 401(k) plan, SEP or SIMPLE IRA if you file for bankruptcy protection. Depending on where you live, filing bankruptcy can also protect your home, cars, bank accounts and other assets from creditors who are trying to sue. The BAPCPA also extends to qualified education savings accounts, including Coverdell ESAs and Section 529 plans, which is an added bonus if you’ve been socking away cash for your child or grandchild’s college expenses.
Taking money out of your retirement can be a temporary fix for your debt problems but you could still end up having to file bankruptcy down the road.
If you’re struggling with how to manage your debt payments, talking to an experienced bankruptcy attorney can help you explore all of your options and choose the one that’s right for your situation. The knowledgeable bankruptcy professionals at the Law Offices of John T. Orcutt are here to help guide you on the path to regaining your financial footing.
Dedicated to helping residents of North Carolina find the best solutions to their debt problems. Don’t waste another day worrying about your debt. Call +1-919-646-2654 today to schedule a free initial consultation to discuss your bankruptcy options.