Chapter 13 Bankruptcy - Retirement Fund Question

[bankruptmillennial]

Hello there,

I'm 30 and have made all the financial mistakes a 20 something could have made; I take full responsibility for where I ended up financially.  It could have all been avoided.

When I finally put my finances in a spreadsheet I realized what I mess I was in.  I wasn't late on payments for credit cards, personal loan, or my student loans.  However, I was spread so thin that I was getting nowhere with the amount of interest I was paying.  I didn't have a good job until I was 26 and then made the mistake of moving to Colorado with no job prospects and only 2k in my bank account.  Of course it was for a girl haha.  When I moved to CO I only had student loan debt.  It took me 3 months to get a job and this is where the credit cancer began.  I eventually got into the tech industry making more money than I ever dreamed of, but I had already accumulated enough debt to make my income to debt ratio eligible for a chapter 13 bankruptcy.  My payment is enormous, but I will be debt free by 34. 

My question is this," If I leave my job, should I cash out my retirement to pay off the chapter 13 or would this be ill advised?"  I have 60k left on the chapter 13 and my retirement account has 70k.  I'm sure after penalties I would only get 40k, but it would help me pay off this debt exponentially faster.  Is it better to free up cash flow and be debt free than keep the retirement?  My monthly bk payment is 1,440.

Any advice is appreciated.  The answer is probably, "Yes, this would be ill advised." I would just like to gather opinions, because this is something I obviously don't bring up in dinner conversation.

I'm actually working on developing a website to share my experience and what the chapter 13 process is like.  Any suggestions for the site would also be appreciated!

Thanks!

Bankrupt Millennial

[cchrissyy]

easy answer - federal law says you can't pay ahead chapter 13 payments to be done with it early.

[bankruptmillennial]

That's actually not true, my attorney let me know that you can in fact pay off a chapter 13 early.  Especially when you're paying everything back in full.  Now, if you're one of the lucky ones that had creditors not complete paper work on time and subsequently decreased the amount owed, completing the chapter 13 would be ill advised, because you would end up paying the original amount owed.  However, in my case, I'm paying everything back in full, so it makes sense for me to pay it off early.

"Paying Your Debts In Full

There is one situation where the court will allow you to pay off your plan early—and that’s when you pay creditors 100% of their claimed amounts. If you pay all that you owe, there will be no need for a payment plan. You won’t need a discharge and your creditors will be made whole."

https://www.nolo.com/legal-encyclopedia/can-i-pay-off-my-chapter-13-bankruptcy-plan-early.html

[Metta]

My question is this," If I leave my job, should I cash out my retirement to pay off the chapter 13 or would this be ill advised?"  I have 60k left on the chapter 13 and my retirement account has 70k.  I'm sure after penalties I would only get 40k, but it would help me pay off this debt exponentially faster.  Is it better to free up cash flow and be debt free than keep the retirement?  My monthly bk payment is 1,440.

Why are you thinking of leaving a lucrative job?

[bankruptmillennial]

I'm interviewing for a more lucrative position and if I do leave I will have the option of cashing out the retirement account.  I'm very anxious to be debt free, but I don't know if using the retirement money is a wise choice.  My gut says no, because I end up losing thousands of dollars.  However, I'd be increasing my monthly cash flow by 1,440 by paying this off and eliminate the stress of having a chapter 13 bk.  I'm working really hard toward paying this off, but I'd like to expedite the process.

[Metta]

That makes sense.

When evaluating a decision like this there are three dimensions to evaluate: Math, Behavioral, and Emotional. If you are married, there is a fourth dimension: Relationship.

1) What does the math say? Is it more lucrative to leave the money to grow or to reduce the debt?
2) What are you teaching yourself by doing this? How are you influencing your future behavior?
3) How does this make you feel? Do you feel safer doing this? Happier?

It's pretty easy to evaluate the math and it sounds as if you've done it. So the math says "No". But math alone doesn't rule the roost.

The behavioral questions you need to ask is what are you teaching yourself by doing this? In this case you will teach yourself that it is ok to cash out the retirement account if you need to. Each time you do it, the reasons for doing so become less momentous until the day you find yourself cashing it out to buy a really nice kitchen range because you "need" the best one. You may also teach yourself that it is really nice to live debt-free. However, you haven't actually paid off the debt in a way that teaches new behaviors to your brain so even though you may enjoy the debt-free life, you haven't learned how to stay there. If it were me, I would count the behavioral answer as a "No".

The emotional question asks how will you feel after you do this? Will you feel happier? Will you feel more secure? If it were me, my answer would be I'd feel wonderful!

If the emotional vote is the only "Yes" vote, I wouldn't do it. That is how I evaluate these things. It is how I decided to step up the pay off of my mortgage so that I could be totally debt-free. It is how I decided not to cash out my IRA to pay off my debts.

[Dicey]

Hell no, because of the penalties and the time value of money. You dug this hole. Don't make it worse by compromising your future self. When you leave your current job, roll your account into something with super low fees a la JL Collins Stock Series. Let it continue to compound in the background. Then focus with all your might and kill this debt with cash flow. I know little about bankruptcy,  and a quick Google search wasn't all that helpful. Does your debt stop accruing interest if you file Ch. 13? Does your repayment plan change if your income increases? Why did you choose this particular option?

The other reason is that it doesn't sound like you have enough to pay it off in full anyway. How would you make up the difference?

[Linea_Norway]

You would lose 70K - 40K = 30K in the form of penalties for cashing out your retirement. That is a big bunch of money that you shouldn't throw out of the window. How much will you gain from not paying interest on the chapter 13?
If you now empty your retirement account, you will have to save like mad the coming years to make up for your lost retirement money. And this time you'll have to do without the tax advantage that you currently have. This tax difference is something you should add to the math to see what is most advantageous. Are the tax advantages similar to the penalties you would have to pay? In that case it levels out more or less.

Savings on chapter 13: 1440 * 40? months = 57.600
Loss in retirement: 30K + tax advantage 30K? = 60K

The we are back at the psychological aspect. Is it OK to bail yourself out from your retirement account? Will you guaranteed behave better behaviour in the future? It will it come back to bite you when you want to retire at old age?

[matchewed]

Don't compound bad money mistakes with more bad money mistakes. Pay off this debt like you would any other debt. With focus. The after tax payments from income will lose you less money than the after tax and penalty payment from pulling out of retirement funds.

[affordablehousing]

It sounds like there's another component too to consider- would trying out this retirement account cashout make a good blog post and earn you some money in your new bankruptcy business? If the blog post would net you the difference, that might be another reason to pursue it. I say that slightly in jest. I think you likely just need to make the payments, work, and save for retirement.

[matchewed]

[bankruptmillennial]

Thank you everyone for your input and advice!  I'm not going to use my retirement account to pay off a large chunk of this debt, because I would lose thousands and like some of you said it wouldn't be a responsible decision. 

I made the decision to file Chapter 13, because I consulted an attorney with a spread sheet of my finances and they immediately suggested I file.  At the time, I couldn't get a re-consolidation from SoFi for the student loans nor did I have a family member that was in the place to give me a no interest loan (nor will I ever).  The Chapter 13 is saving me thousands in interest and has also forced me to get my finances in order.  In Colorado, you are able to include student loans in a Chapter 13 which is ultimately what gave me the final push.  I pay extra when I can and now I'm projected to be debt free by the age of 34 versus NEVER. Haha.  I've attached a pdf of the spreadsheet that included the irresponsible hole I dug for myself.

The future is looking much brighter, my credit score finally hit 700.  I started this process almost two years ago, but have only been in the plan for 9 months.  I've done everything I can to get my score back up which really only entailed two things: 1. getting a secured credit card, only using 20% of the limit and paying it off early 2. Automating all my bill payments, so they are always paid on time.

Thanks again for taking the time to reply!

Bankrupt Millennial

[matchewed]

Something seems off. You filed chapter 13 bankruptcy two years ago and you have a credit score of 700? Color me surprised. Also you have an error in your interest on the Federal Student Loans.

What you may want to consider is to pay off the extremely high interest debt and put a pause on the paying into the retirement accounts.

[bankruptmillennial]

A chapter 13 is essentially a forced loan with no interest consolidating all of your debt, so there's no paying off any of these accounts outside of the chapter 13 plan as it is all included in the chapter 13 payment.

I was also surprised by how fast my credit rose.  I'm not sure if it's, because a chapter 13 is less damaging than a chapter 7 or what?  I'm really not sure, but things are moving forward.

What's the miscalculation on the student loans? The random 400 numeric value is a typo if that's what you're referencing.  Let me know if it's something else though!

Thanks!

[cchrissyy]

the amount of credit card debt is totally within the range of what people usually pay down and don't need bankruptcy. but i guess that ship has sailed.

FYI to lhamo, when you file chapter 13 all debt is frozen and interest stops accruing, and at the end of your payment plan, everything is wiped out.  so that's usually why it's worth doing. Just not normally for student loans and not normally at dollar amounts this low.

[Dicey]

So in effect, all those interest rates shown on your spreadsheet are frozen at ZERO?

If that's the case, may I suggest you should be counting your lucky stars? Tighten your belt, increase your earnings and consider your lesson learned. Pay it off as scheduled, not a moment before.

[bankruptmillennial]

Yes, all debt is frozen and no interest accrues.  I make a base payment of 1,440 a month which the Chapter 13 trustee then distributes to the creditors.

This was definitely an unconventional route and it was advised I move forward by 3 attorneys.  I like to believe they had my best interest in mind and that it had less to do with the fees they were making from my case, but who knows?  I've met people who said this was a horrible decision and others that thought it was a brilliant way to be debt free much sooner. 

[Dicey]

Any advice is appreciated.  The answer is probably, "Yes, this would be ill advised." I would just like to gather opinions, because this is something I obviously don't bring up in dinner conversation.

I'm actually working on developing a website to share my experience and what the chapter 13 process is like.  Any suggestions for the site would also be appreciated!

Thanks!

Bankrupt Millennial

So, are you convinced to leave the retirement money alone? If so, perhaps our work here is finished.

P.S. Making Attempting to make money blogging is probably not the highest and best use of your time.

[bankruptmillennial]

Dicey, I read your journal and you should heed your own advice; stop wasting your time blogging. This was a general inquiry, not an attempt at a blog.

Thank you everyone for contributing.