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Using Retirement Savings To Pay Off Debts

Using Retirement Savings To Pay Off Debts

Should You Use Retirement Savings to Pay Off Debt?

Using retirement savings to pay off debts is usually allowed by most 401k or IRA providers in an especially bad debt situation.  Is it wise to use retirement savings to pay off debts? The answer to this is usually “no.” It is generally a very bad idea to use retirement savings to pay off debts.

Retirement Savings Require Taxes and Penalties 

If you prematurely remove retirement funds from an IRA or 401k, you will usually face stiff taxes and penalties.  The tax amount will usually be the same as your normal tax bracket which might be 15-20% or higher. To make matters worse, you will likely face a 15% tax penalty or even greater.  This is essentially making it so that you could lose up to 40% of your account benefit just to taxes and penalties. This makes it excessively costly when attempting to pay off debt.   Even if you face lesser penalties, it will still be a very expensive and overall inefficient way of dealing with debt.

Retirement Savings Should Be Used for Retirement

Retirement savings are specifically designed to provide solid resources and easier living during retirement.  In most people’s retirement, economic resources are limited. The value of having solid retirement accounts cannot be overstated.  You will have much lower tax brackets and no penalties also if you wait until retirement. Retirement accounts were never designed for paying off debts: they were designed to provide an easier life after retirement.

Retirement Savings are Exempt in Bankruptcy

You should not use retirement savings to pay off debt unless it is absolutely necessary.  In support of this fact, the government has made most tax-exempt, tax-deferred accounts “exempt” in bankruptcy.  Exempt simply means “not counted” as an asset in bankruptcy. That means you get to keep the entire account even as you get rid of your debts in bankruptcy. 

Therefore, it would be much wiser to file a Chapter 7 or Chapter 13 bankruptcy case generally to deal with debts.   Depleting your retirement is generally a very short-term solution that will only create problems down the road. Instead, bankruptcy permanently eliminates or restructures your debts.  It is a powerful solution that will not drain your retirement resources in any way.

Refiling Bankruptcy in Indiana

When Can I Consider Refiling bankruptcy in Indiana?

Refiling Bankruptcy in Indiana

Thinking about refiling bankruptcy in Indiana? Many people in Indiana find themselves needing to refile for bankruptcy.  Do not be worried. You are not alone! Indiana people frequently refile for bankruptcy.   If you need to file bankruptcy again, you almost certainly will be able to file a new bankruptcy case in some way immediately.   Understanding what type of bankruptcy you can file will be important for the planning you will need to do with your bankruptcy attorney.

Chapter 7 to Chapter 7 – Indiana Refiling Wait Time

You can usually file for Chapter 7 every eight years.  Therefore, you need to wait until 8 years have passed from the last date you filed for bankruptcy.  You do not need, however, to wait for the full 8 years. You can usually just file for Chapter 13 right now instead, no matter how much time has passed.  Filing Chapter 13 could be a much better option than waiting for Chapter 7, and it usually does not cost very much to get the case started.

Refiling Chapter 13 in Indiana

Chapter 13 can usually be filed at any time as long as there is currently not another bankruptcy case active and open in Indiana.  There are some restrictions, however, to when you can get a discharge at the end of the case when you have recently filed a Chapter 7 beforehand.  However, you can almost always refile a Chapter 13 and get it filed very quickly. 

Chapter 13 can be a powerful way to deal with debt that is always available to most filers.  Almost all people who have previously filed for bankruptcy can file for Chapter 13 at any time thereafter.  They will have the protection of the court from creditors for the entire time their payment plan is operating.   

The one exception that can cause problems is a person who has had multiple Chapter 13’s that have all been dismissed in the last couple of years.  In situations like these, creditors will sometimes object due to the rapid, multiple filings. The court may also limit the amount of protection a debtor will receive from creditors in such a multiple-filing scenario.

Debt Collectors Calling After Bankruptcy

Debt Collectors Calling after bankruptcy -List of Creditors

Debt collectors should not be able to call after bankruptcy.  Debt collectors who continue to call after bankruptcy are in direct violation of the bankruptcy code.  You have powerful options to shut the creditor down and even receive money for damages.

Debt Collectors Cannot Violate the “Discharge”

If you had a debt listed in your bankruptcy, it is usually discharged when your case concludes.   Any debt that is “discharged” can never be collected against ever again. Your debt collectors cannot call or collect after this discharge order permanently eliminates your debt.

Collectors that do not comply can be sued in bankruptcy court.  A separate action can be opened in your old bankruptcy case called an “adversary.”  This is simply a lawsuit in Federal Court that is connected to your old bankruptcy. In this adversary case, your attorney can seek damages for every single violation of the discharge.  For instance, if the collector has called or visited your house several times, you may be able to seek a fine for every time they moved against you.

What To Do If Collectors are Calling You After Bankruptcy

First, you need to notify the creditor of your bankruptcy.  Sometimes this is all you need to do. Make sure to give them the case number and any other identifying information such as the date you filed. 

Second, you may want to call your bankruptcy attorney.  It may be wise to double-check that this particular creditor appeared in your bankruptcy schedules.  If they are not in your bankruptcy schedules, then it is likely that the creditor was never informed.  You may need to officially add them to the bankruptcy or simply have your attorney give them notice, depending on the situation.  

Third, if the collection becomes severe or does not stop, you should ask your attorney about finding counsel to bring a lawsuit.  Certain bankruptcy attorneys will commonly bring claims against over-aggressive creditors such as these. Either your bankruptcy attorney will bring the lawsuit or your attorney can likely refer you to another attorney in the area that frequently brings such lawsuits.  Remember, this is only for the most severe cases. Usually, simply informing the creditor of the bankruptcy and demanding them to stop is all that needs to take place to correct the problem.

Debts Sold to Collection Agency

Debts Sold to Collection Agency

Debts are frequently sold to a collection agency.  Having your debt held by a collection agency can be a much worse position than just owing to the original creditor.  Understanding how debts are sold to a collection agency can greatly increase your credit-related knowledge. It will also help you understand how debts are collected.

Concepts Related to Collection Agencies

Collections concepts and terms are sometimes misunderstood.  For instance, most people believe that “charged off” is a good term on credit similar to the term “written off.”   “Charged off” is actually a bad term usually: it generally means that you may now have to deal with a collection agency.  The original creditor believes that your balance is now a “bad debt.” They will then simply transfer it to a more aggressive collection department or even sell it directly to a collection agency. 

Another concept that is important to understand is “transferring of a claim.”  In our modern society, debts can actually be sold or transferred to any party.   Essentially, the original creditor can just sell their right to the money owed. This includes the right for the new party to sue you for the debt.  Collection agencies will frequently have claims transferred to them to pursue in collection. They are experts only in the realm of debt collection, even suing sometimes 100’s of people at one time.

When Debts are Sold Things Get Much Worse

When your debt is sold to a collection agency, things usually get much worse.   First, the new company does not simply keep large books for people who owe money.  Instead, they aggressively attack with collection letters, calls, and other forms of collection.  These can be very difficult to overcome, usually forcing the person into settling the debt, getting garnished, or eventually filing for bankruptcy. 

Secondly, some debts will now start appearing negatively on your credit report.  Certain debts such as medical or locally-based debts usually do not even appear on your credit report until they go to a collection agency.  This can take an otherwise good credit score down quickly when negative information begins appearing on the credit report. 

Lastly, debts sold to a collection agency can result in massive, dead-end lawsuits.   For instance, if a mortgage company forecloses on a house, there can sometimes be a large debt that floats around out there for several years against mortgage holder(s).  Similarly, large or even astronomical medical debts can float out there for many years, never settled. When these debts go to collection agencies, sometimes the new creditor will immediately sue for $100,000 or whatever other large amount just to force the issue.   Those who owe the money will not have a choice. Bold action will then need to be taken to counter the situation with a settlement or a bankruptcy filing.

Credit Score Changes Decrease Bankruptcy

Credit Score Changes Decrease Bankruptcy

Major changes are coming to how credit scores will be calculated.  These credit score changes will likely make it more difficult for many people to obtain new credit.  This, in turn, will likely decrease the total amount of bankruptcy filings to some degree. People who historically have turned to bankruptcy may have a lower credit score soon, which will decrease their ability to get into more debt.

Late Payments – New Credit Score Changes

Late payments will now trigger a larger dip in credit score.  People in danger of bankruptcy are usually more likely than others to suffer from late credit payments.  This could decrease credit scores before these people are able to get into more debt. Late payments have always had a strong effect on credit score, but this effect will now be intensified with the recent changes.

Not Paying Off Credit Cards in Full

If you do not periodically pay off your credit cards in full, this will now have an adverse effect on credit.  In the past, a certain ratio of credit card balance was more preferred than paying the credit card off in full.  Now, the greater reward will go to paying off credit cards in full.   

This will have a powerful effect on decreasing the credit ability of people who are in danger of bankruptcy.  As credit cards build, credit scores will suffer. This can potentially cause the never-ending increase of credit card debt to be cut off much earlier.  It may allow some people to stop incurring credit card debt at a point where they will actually be able to avoid bankruptcy.

Personal Loans

Personal loans will now have a greater damaging effect on credit score.  Personal loans are usually used to catch up on bills. Other times, they are used to purchasing things that cannot be afforded.  Personal loans are a tell-tale sign that bankruptcy may be coming in the future. Personal loans may now do sufficient damage to credit to prevent the incurring of future debt.  This may also have the potential to ultimately decrease bankruptcy filings.

Conclusion: Responsible Lending Reduces Bankruptcy

On the most simple level, responsible lending choices ultimately reduce bankruptcy filings.   If the changes to credit score calculation reward good credit behavior and penalize bad credit behavior, then ultimately bankruptcy filings will be reduced.  The best evidence of this was the irresponsible mortgage lending that led to the 2008 financial meltdown. The ensuing bankruptcies were largely a result of those irresponsible lending and credit calculation choices.  Better credit calculation can result in a more stable economy and reduce bankruptcy.

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