Retiring With Debt in Phoenix? Learn About Your Debt Relief Options
Unfortunately, debt can become a serious burden when your working years end. Credit cards, medical bills, personal loans, mortgages, vehicle payments, and other obligations can become particularly difficult to manage when your income shifts from a paycheck to Social Security, pensions, and retirement savings.
If you are retiring with debt, draining your retirement savings to pay creditors is not necessarily your only option. Finding the right strategy depends on your debts, income, property, retirement accounts, and long-term goals.
Cy Hainey is an experienced Phoenix bankruptcy attorney. At Hilltop Law Firm, we can evaluate the entire picture before you make decisions that could permanently reduce the savings you need for retirement.
Can Retirees File Bankruptcy in Arizona?
There is no maximum age for filing bankruptcy, and being retired does not prevent someone from seeking Chapter 7 or Chapter 13 relief. The important question is whether bankruptcy makes financial sense.
Chapter 7 Bankruptcy
Chapter 7 is designed to eliminate qualifying debts without requiring a multi-year repayment plan. For retirees, Chapter 7 may be worth investigating when substantial credit card, medical, or other qualifying unsecured debt is consuming limited monthly income.
Chapter 7 uses a means test to help determine eligibility. It compares income and expenses, although certain income such as Social Security benefits is excluded from the means-test calculation.
If you do not pass the means test in Arizona, you may qualify still for Chapter 7 by consulting the more detailed calculation on Official Form 122A-2, which deducts certain allowable expense.
Chapter 13 Bankruptcy
Chapter 13 allows individuals with regular income to reorganize debts through a repayment plan lasting several years. For many retired people, Chapter 13 may be a better solution in circumstances involving secured debts, mortgage arrears, or other obligations that require a structured solution.
How Is Debt Different When You Are Retired?
Debt can become harder to manage after retirement because your income may be fixed. A working debtor may have opportunities to increase hours, pursue promotions, or change jobs. Someone relying primarily on retirement income may have fewer realistic ways to increase monthly cash flow.
Pursuing effective retirement debt relief requires looking beyond the amount you owe. You will want to consider where your income comes from, which assets are protected, which debts can potentially be discharged, and what your finances will look like five or ten years from now.
Are Retirement Accounts Protected From Creditors in Arizona?
Many retirement assets receive significant legal protection, although the exact protection depends on the type of account and circumstances.
Arizona’s exemption statute provides protection from creditor claims for assets payable to participants or beneficiaries of numerous qualifying retirement plans, including plans under Internal Revenue Code sections 401(a), 403(a), 403(b), 408, 408A, 409, and certain Section 457 deferred-compensation plans. The statute contains exceptions, including certain amounts contributed within 120 days before a bankruptcy filing.
These protections can cover common retirement arrangements such as qualifying 401(k)s and IRAs, depending on the account and circumstances. This is one reason retirees should be extremely cautious about liquidating retirement accounts simply because collection calls have become stressful.
Before withdrawing retirement money to pay unsecured creditors, determine whether that money is legally protected and whether the debt itself could be discharged or otherwise resolved. Once protected money is withdrawn and spent, you cannot undo the transaction.
How Do Arizona Bankruptcy Exemptions Protect Retirees?
Arizona bankruptcy exemptions are laws that identify certain property that debtors can protect from creditors, subject to statutory requirements and limits.
Arizona residents who are filing bankruptcy generally rely on Arizona’s exemption system rather than the federal bankruptcy exemption list. The U.S. Bankruptcy Court for the District of Arizona directs debtors to Arizona’s exemption laws in Title 33, Chapter 8.
Exemptions can apply to categories including:
- A qualifying homestead
- Certain types of personal property
- Money in a bank account up to the applicable limit
- Qualifying retirement assets
The value and nature of the asset, how it is titled, the applicable statute, recent transactions, and other facts can affect exemption analysis. A bankruptcy attorney can review your assets before filing and identify potential exposure.
Does Social Security Debt Protection Keep Benefits Safe From Creditors?
Federal law gives Social Security benefits substantial protection against ordinary creditor collection. These benefits generally are protected from execution, levy, attachment, garnishment, and other legal processes.
That means Social Security debt protection is strong, but it is not absolute. Important exceptions exist. Benefits may be withheld for certain obligations, including:
- Certain federal tax debts
- Child support
- Alimony
- Restitution
- Qualifying debts owed to federal agencies
Types of Debt That Can Bankruptcy Help Retirees Eliminate
Bankruptcy can potentially eliminate many forms of unsecured debt, including credit card balances, medical bills, personal loans, and certain other unsecured obligations.
Certain tax debts, domestic-support obligations, and other categories can may not be discharged through bankruptcy. Secured debts such as mortgages and vehicle loans also require separate consideration because a bankruptcy discharge does not simply erase a creditor’s valid lien on collateral.
A knowledgeable bankruptcy attorney can help determine whether bankruptcy is the right solution for you, and help you determine if Chapter 7, Chapter 13, settlement, or another approach is appropriate.
Speak With an Experienced Phoenix Bankruptcy Lawyer
Before cashing out retirement savings, selling important property, or allowing debt payments to consume the income you need for retirement, get an individualized assessment. Attorney Cy Hainey can review your case and advise you about your options during a free consultation.
We can even arrange a convenient Zoom meeting. Hilltop Law Firm offers services in English and Spanish.
Call (602) 466-9631 to learn more today.
Frequently Asked Questions About Retiring With Debt in Phoenix
Can I file bankruptcy if I am already retired?
Yes. There is no maximum age for filing bankruptcy. Retirees may qualify for Chapter 7 or Chapter 13 depending on their income, debts, assets, and financial circumstances. A bankruptcy attorney can help determine whether bankruptcy or another debt-relief strategy makes sense for your retirement goals.
Will I lose my retirement savings if I file bankruptcy in Arizona?
Not necessarily. Many qualifying retirement accounts receive significant protection under federal or Arizona law. But protection depends on the type of account and your specific circumstances. Before withdrawing, transferring, or using retirement savings to pay creditors, speak with an attorney about the Arizona bankruptcy exemptions that may apply.
Can creditors take my Social Security benefits to pay debts?
Social Security benefits receive substantial federal protection from ordinary creditors, although exceptions exist for certain obligations, including some federal debts, taxes, child support, and alimony. Understanding Social Security debt protection can be particularly important when Social Security provides much or all of your retirement income.