Should I withdraw money from my 401(k) to pay down debt and avoid bankruptcy?

In my meetings with potential bankruptcy clients I often get asked a version of this question by people who are looking for any last ditch efforts to avoid filing bankruptcy. They generally believe if they pull out a bunch of money and propose a debt settlement with creditors they can avoid bankruptcy. This may or may not be true. There are other concerns to take into account when considering this course of action. One not addressed here, but will be in another post is tax implications. First, are retirement contributions protected if you file bankruptcy? For those looking to file in the State of Utah, the short answer is yes. However, there are some qualifications. They relate to the fact that the contributions must be in a properly qualified retirement account, which an attorney can help you determine. Second, any contributions to your retirement account made by either you or on your behalf (such as employer contributions) in the twelve (12) months prior to your bankruptcy filing are not protected. Therefore, in Utah if you file Chapter 7 your trustee is likely to require all contributions to your retirement accounts in the last year to be turned over to help pay your creditors. If you file a Chapter 13 case the impact of this can be mitigated. Only an experienced attorney who understands Chapter 13 bankruptcy can help you work this issue out. Because an experienced bankruptcy attorney like those at Red Rock Legal Services can help you protect your retirement I usually discourage liquidating a retirement account prior to filing bankruptcy. If you work through a bankruptcy and keep the amounts in your retirement account how can this benefit you? First, there are worst things than bankruptcy, such as not having a retirement waiting for you when you need it. Let do a simple example. Let’s pretend you have $40,000 in credit card debt running up at 18% interest and a 401(k) from a prior employer in the amount of about $25,000. The thought occurs to you to pull out the money and pay down a chunk of this credit card debt. You need to consider if you withdraw early you will need to pay ordinary income taxes as well as a 10% penalty, reducing the balance by about 25%. So immediately you go from $25,000 in the account to $18,750. If you put that all towards the $40,000 you will still have $21,250 accruing 18% interest and NOTHING in retirement. For many families considering this extreme measure there is a good chance you have put off other expenses and the temptation to use this influx of cash on other items will be great. You might not even be able to get $18,750 to the credit card balances. There is another much greater cost to you. When you take the money out of the retirement account early you now lose the advantage of the long-term growth that comes with a 401(k). Let’s assume you make no additional contributions to the 401(k) and your $25,000 grows at an average rate of 6% per year for 35 years. At the end your 401(k) would be worth $ 192,152! Every $1,000 you take out of the 401(k) to pay down debt today will cost you $10,281 in future retirement funds. Considering retirement is more or less protected under bankruptcy law in Utah, this is a costly way to pay credit card debt you can get rid of by bankruptcy and have probably paid on original principle loaned to you out several times over all ready!

Bankrkuptcy Filing in Utah Bucking National Trend

According to an article in the Salt Lake Tribune found here the filings for bankruptcy are up in the State of Utah. This is opposed to the national trend where filings are down nationally. The article quotes Jason Kilborn, a visiting scholar at the American Bankruptcy Institute and professor at the John Marshall Law School in Chicago. He stated that “What you’ll often see is that more people will file for bankruptcy if they think the economy is improving,” Kilborn said, explaining that by eliminating or reducing debt those consumers believe they will be better positioned to take advantage of the turnaround. “And it could be that some consumers in Utah see the economy a little different than elsewhere.” He also says in the article that Utah's home foreclosure rate could be playing a part in the amount of bankruptcies that are being filed. He contends that in other states there is an enormous backlog of home foreclosures to be processed, which allows many consumers to stay in their homes, even though they are seriously in arrears on their payments. However, it appears from his research that the "foreclosure process in Utah is clipping along" at a more normal rate and may be more quickly affecting consumers there than in other parts of the country. The article states that RealtyTrac, which tracks foreclosure filings nationally, reported that Utah had among the 10 highest rates of filings for the third quarter of 2011. Citing to statistics maintained by the bankruptcy court in the State of Utah, of the 14,552 Utah consumers who sought bankruptcy court protection from their creditors through the first nine months of this year, 33 percent filed for Chapter 13, according to the U.S. Bankruptcy Court for Utah. The remaining 67 percent filed for Chapter 7. Chapter 13 gives people the opportunity to formulate a plan to repay all or most of the time only a portion of their obligations over time. Chapter 7 involves a trustee liquidating a debtor’s assets and distributing the proceeds to creditors. What might be the best course for you can only be determined by an experienced bankruptcy attorney. Contact Red Rock Legal Services in St. George or Cedar City for a free consultation regarding your options and how to protect yourself through bankruptcy.

How long will it take to get a mortgage after bankruptcy?

When prospective clients come to my office I often must deal with concerns people have about how bankruptcy will affect their credit in making future purchases. Most often the question takes the form of whether or not they will be able to get a mortgage on a home. While it used to be the general rule that you might need to wait 7 years after a bankruptcy or foreclosure, I have had clients who have told me a few years (3 years for a chapter 7) after completing their bankruptcy they are under contract to purchase a home. I have even been able to get a client while still in a chapter 13 case approval from the bankruptcy court to purchase a home with creative financing arrangements. I came across a recent article in the Chicago tribune about time frames for getting a mortgage after a bankruptcy or foreclosure. The article discussed the general rule on time frames to get a mortgage after bankruptcy or foreclosure is now about 3 years. It further said depending on the reasons for the bankruptcy or foreclosure the time frame may be less, even as little as 12 months, if the bankruptcy or foreclosure is a result of “extenuating circumstances” over which you have no control. These circumstances include job loss, serious illness or death of a wage earner. However, divorce or business failure or being overwhelmed by too much debt is not considered life events which are extenuating. But proving the life event is only one step in the process. You must also be able to show you can make monthly payments and keep your credit clean after the bankruptcy or foreclosure. The type of mortgage you are seeking affects how long you may need to wait. • VA Loans—12 months after filing chapter 13 if you can receive court and trustee approval for the loan. 24 months after filing chapter 7 and receiving a discharge, but according to the article in the Tribune it could be less with extenuating circumstances. The wait is the same if you did a deed in lieu of foreclosure or a foreclosure. However, you can be protected from any second mortgage deficiencies by filing a bankruptcy and then turning over the house. • FHA Loans—the rules are essentially the same as a VA loan and if you were to go through a short sale or foreclosure the wait is at least 3 years, but potentially shorter with extenuating circumstances. • Conventional Loans (which are generally purchased by Fannie Mae or Freddie Mac)—the waiting period is tiered. Borrowers who suffered a life event discussed above the period of time to wait are approximately 24 months. If you have not suffered such an event the time period goes up to 48 months. According to Freddie Mac's guidelines, if a borrower's financial issues were due to his own financial mismanagement, a credit status must be re-established for at least 84 months if they was foreclosed upon. The time period could be 60 months if they filed more than one bankruptcy petition in the past 7 years or 48 months after the discharge or dismissal of a Chapter 7 bankruptcy. If there is conveyance of a deed in lieu of foreclosure or a short payoff related to a delinquent mortgage the period could be 48 months. The wait to get a mortgage is 48 months for all other substantial adverse or derogatory credit reporting. It is just 24 months from the discharge date of a Chapter 13 bankruptcy. If “extenuating circumstances” can be shown, and if the credit report indicates the borrower has re-established an acceptable credit reputation, he still will have to wait 36 months if he went through a foreclosure or filed more than one bankruptcy petition in the past seven years. But the wait is just 24 months if his bankruptcy was discharged or dismissed, if he went through a short sale or deed-in-lieu, or if he suffered another significant adverse or derogatory credit event. Only an experienced bankruptcy attorney can give you a full picture of what your options include.

How bankruptcy can stop a foreclosure.

I have many clients that come into the office and want to keep their home. They are behind on payments and facing foreclosure. Most may be “under water” on the home, meaning the value of the home is substantially less than the amount they owe to the bank. They may be months behind on the mortgage payment for many reasons. Some due to unemployment, others its medical expenses or even an adjustment to the monthly payment they did not anticipate often due to the interest only period on the loan coming to an end. Can you make regular monthly payment? Whatever the reason they are behind, as they sit across the desk from me and ask how they can keep their home, my first question generally is whether or not they can make the regular ongoing payment. Many of these people want to do all that they can to save their home. Although we discuss negative equity and market forces and how long it will take for them to recoup the loan to value amounts they want to keep their home. No amount of persuasion on my part to move them forward to a brighter financial future with as broad of a fresh start as bankruptcy can provide will move them out of the house. That is a decision each client must make for themselves and I try to assist them in accomplishing their goals even though I might disagree. If they can make the regular ongoing payment, since bankruptcy law prohibits modification of a mortgage on a primary residence, I next ask could they bring the past due amounts or arrearage including all late fees, collection and foreclosure costs current over a time if we broke it up into monthly payments. They are usually a bit less sure about this but want to try. We discuss how to accomplish this goal via Chapter 13 bankruptcy proceedings. We look at their budget, look at what debts will be discharged under bankruptcy, whether or not we can get rid of the second mortgage, how much equity they have in all property both real and personal above exemption amounts and how to make certain debts like car payments more affordable by forcing a restructure of the debt on the bank (reducing interest, re-amortizing the loan, “cramming down” the principal). If they can make it work through a chapter 13 plan and it gets them current and debt free except for the remaining balance of the mortgage we do it. Only an experience bankruptcy attorney can tell you what your options are and how to accomplish your goals of saving your home and stopping foreclosure. Contact one today!

Do I need an attorney to file bankruptcy in Utah?

For purposes of full disclosure, an attorney is not required to file bankruptcy. But do you need an attorney’s assistance? Yes. Under the bankruptcy code you can represent yourself; you can even use the assistance of individuals called “bankruptcy petition preparers”. These individuals are generally not attorneys and are not allowed to give you legal advice. They are only allowed under the law to enter into the proper forms the information that you give them. This is where the problem with these individuals comes up. What if you would benefit from filing a Chapter 13 reorganization plan rather than a “straight bankruptcy” under Chapter 7? Certain debts are not dischargeable under Chapter 7 cases which are dischargeable under Chapter 13. Do you know which ones are dischargeable and which one are not? What property you are allowed to claim as exempt in bankruptcy is a legal determination based upon a review of your property and the state statutes. Who is going to determine what you can protect and what you cannot? Will you loose your tax refund? All of these questions can be answered by experienced bankruptcy counsel. These questions should not be answered by a petition preparer. But what are the advertisements you see with a bankruptcy petition preparer? I will quote from one less than dependable preparer’s website. This petition preparer “offers professional and reliable bankruptcy assistance services. With us, there is no hype, no gimmicks, and no hidden fees. Lets us put our experence (sic) and expertise to work for you. $299 plus court fees to prepare all of your documents ready for the bankruptcy court.” He further offers “100% satisfaction”, and will “hold your hand through the entire process”, all you have to do is “sign and file”. These people’s motivation may be coming from an honest place. Or it might not. They may be preying on your desperation to get out of the situation you are in for as little money as possible. I and my friends in the bankruptcy bar deal with several cases each year where someone paid one of these preparers for help, the case was full of mistakes and then must pay me even more to correct the case, then I would have charged up front to do it right the first time. Let me see if I can give an example of what going to a bankruptcy petition preparer is like. If I as an attorney were to invite you to my home to perform to remove that deadly malignant tumor for a quarter of the cost the doctor and hospital were going to charge you would you come? Why trust your bankruptcy fresh start to someone without any legal training? If something goes wrong who will help you? The person you paid cannot! They should not even be telling you what they think your rights are in bankruptcy. If they do, and they will also tell you they can do everything an attorney can do for less than half the cost they are scamming you, lying to you, breaking the law! Do not entrust the your financial future to someone who by law is forbidden from giving you advice and does so anyway. Meet with experienced counsel. The extra money it will cost to purchase peace of mind will make you glad you did.