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Why You Should Not Withdraw from Your Retirement to Pay DebtsWhen you are going through a financial crisis, your focus is on meeting your immediate needs and not your long-term savings. The coronavirus outbreak is creating a financial crisis for the people who have lost their jobs or seen a reduction in their income. It is understandable to justify withdrawing money from your 401(k) if you need to pay your mortgage or a vehicle loan. The Coronavirus Aid, Relief and Economic Security Act (“CARES Act of 2020”) has made it easier for people to withdraw from their retirement accounts. People younger than 59 ½ years old will temporarily be allowed to withdraw up to $100,000 from their 401(k), 403(b) or Individual Retirement Account (IRA) without a 10 percent penalty or borrow up to $100,000 with a longer repayment period. Even though there is no penalty for withdrawing, this is still a taxable event, but the taxes can be paid over a three-year period, rather than all at once next year. However, you should consider other options, including bankruptcy, before you make a withdrawal that could jeopardize your retirement. You lose the time value of your invested funds working for you over a 20 or 30 year period.  

Relief for Consumers

The CARES Act of 2020 includes several provisions that may help you with your debts and personal expenses. Most people know about the one-time payout of $1,200 that most individuals will receive, but the law also:

  • Adds additional funds and weeks for unemployment
  • Provides foreclosure moratorium for 60 days
  • Allows people to forbear their federally backed mortgage payments for up to 12 months
  • Suspends payments on federally backed student loans until September 30th 
  • Excludes stimulus payments from their income if they file for bankruptcy
  • Extends the maximum repayment period for Chapter 13 bankruptcy plans that have been approved by the Court from five years to seven years

Some creditors have also shown some willingness to be flexible with their customers who have been financially affected by the coronavirus outbreak, such as delaying collection action or modifying loan agreements.

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What to Do If You Lose Your Job During BankruptcyYour job income plays a major part in how you file for bankruptcy. Your current monthly income (CMI) determines whether you automatically qualify for Chapter 7 bankruptcy or need to take the Means Test. If your income is too high for a Chapter 7 bankruptcy, then you can file a  Chapter 13 bankruptcy, which uses your income and certain expenses to determine your monthly payments. Losing your job during your bankruptcy case could have a significant effect on the process. In this situation, it is critical to immediately inform your bankruptcy lawyer about your unemployment so you can discuss how you will respond.

Chapter 13 Repayment Plan

If you already qualified for Chapter 7 bankruptcy, becoming unemployed should not change your status. On the other hand, losing your job income will affect your ability to make Chapter 13 bankruptcy payments because you will have less disposable income. If you will not be able to afford your next monthly payment, you must not miss the payment without any explanation because the bankruptcy trustee could file a motion to have your case dismissed, allowing your creditors to take debt collection action against you. Instead, your bankruptcy attorney can help you through legal action, such as:

  • Converting your case to a Chapter 7 bankruptcy
  • Creating a new repayment plan with reduced monthly payments through a modification 

A modification will take into consideration your current income and expenses. Depending on the number of months initially proposed in your plan, you might be able to extend the time of your plan, but a plan cannot exceed 60 months. 

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National Association of Consumer Bancruptcy Attorneys State Bar of Texas
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