“So the lesson here is that you should never use your retirement accounts to pay off your debts.”
THE clients are seniors. The wife is 67 and had just retired from a lifetime of being a registered nurse. She has social security benefits of $2,100. The husband is 67 and has social security of $700.
So together, they have social security of $2,800. They don’t own a house. They live with their daughter and they pay her rent of $1,000. The $1,000 covers utilities, except food. The daughter is a single mom with two daughters aged 10 and 8. She works as a hairdresser. I understand that she makes about $2,000 a month after deducting rent of $200 for a station.. She has her own clientele. So she takes home about $1,800 a month. She makes some extra income by selling her clients hair products including shampoos that are sold only through hairdressers. She makes another $300 a month profit on those products. For a single mom with two kids, her net income of $2,100 is hardly enough to make ends meet. So, the $1,000 of rent that clients give to daughter is more of a contribution to their household of three adult and two young children.
Their household’s income is therefore $2,800 from the clients’ social security plus $2,100 from the net income of the daughter as a self-employed hairdresser. So the household income for this family becomes $4,900, less rent of $1,400, and yields a net of $3,500 for necessary monthly living expenses for a family of five. The clients are paying for two cars of about $400 each. They decide to return one car but keep the other, thereby cutting car ownership expense by $400 a month.. They return the 2016 Honda Accord, but keep the 2014 Camry, which has three more years of payments to go.
The clients seem to be doing ok if you don’t dig further into their financial situation. I check their 2016 tax returns and it immediately jumps out that there was $37,000 retirement account liquidation — $25,000 was a liquidation of wife’s 401K and $12,000 was a liquidation of husband’s IRA. In addition, there was $48,000 of disability pay that went to wife. So, I’m wondering where did the $48,000 plus the $37,000 went to.
I asked them what happened to the $85,000 of disability and retirement account liquidation that you received last year? They said that all $37,000 of the retirement account was used to pay credit cards, and the $48,000 of disability was used for living expenses and whatever was left over probably another $20,000 was also used to pay credit cards. I said, “you’re kidding, right?” Why use retirement and disability to pay credit cards when both sources of funds are completely exempt in Chapter 7.
In other words, if they filed Chapter 7 last year, they would still be able to keep their $37,000 of retirement accounts, plus still keep the $20,000 of disability in cash. So now, they would still have $57,000 of cash in the bank. My next question is so how much do you still owe of credit cards after paying $57,000? They said that they still owe about $100,000 of credit cards! One hundred thousand of credit cards requires at least $3,000 of minimum monthly payments. Even if the wife were still working as a registered nurse, she would gross about $8,000 a month and net about $6,500. Three thousand dollars a month or credit cards is almost 50 percent of the wife’s net take home pay if she were still working. But now her social security of $2,100 is not even enough to cover the $3,000 to keep the $100,000 of credit cards current.
I told them that they should have seen me last year before using up their retirement accounts and disability. They would have saved the $57,000 and still discharged all of their credit cards. But now of course they can still discharge all of the $100,000 of credit cards left after they paid off $57,000, but all of the $57,000 is gone!
“Yes, we really regret liquidating our retirement accounts and using the rest of the disability to pay the credit cards…” If we still had the $57,000 today, after discharging the $100,000, we would probably just pay off the car loan of $12,000 on the 2014 Camry so we don’t have to pay the $400 anymore.
So the lesson here is that you should never use your retirement accounts to pay off your debts. At this time, retirement accounts up to $1.2M are exempt in bankruptcy.
In other words, you can keep as much as $1.2M of retirement accounts as exempt assets when you file Chapter 7! That’s a lot of retirement account money! Even at a measly 5 percent income in a managed portfolio, you can use $60,000 a year without reducing the $1.2M of principal! That extra income in addition to social security makes for a comfortable retirement. Just don’t get sick.
Pray to our God for good health as you retire and long life! Read Psalm 91 “…whoever remains under the protection of the Almighty…God says ‘I will save those who love me and will protect those who acknowledge me as Lord. When they call to me, I will answer them; when they are in trouble, I will be with them. I will rescue them and honor them. I will reward them with long life; I will save them.” How do you know this is true? Because the Bible is the word of God, and God doesn’t lie! Of course, this Psalm was actually written maybe 3000 years ago by Moses, who was really close to our God. So that’s good enough. Pray to our God, the God of Moses and Israel, cry to him in your distress, and your cry for help will reach his ears in his sanctuary! I think it must have been the prophet Samuel who said this in Psalm 18. When you cry to our Lord in your distress, He hears you! That is really good to know, is it not?
So let’s say you got sued for breach of contract for backing out of the marriage proposal that you made of to Kim Jung Un’s sister. She sues you for $1.0M. Your 401K would be $1,122,000; yes that’s right; your retirement account is over $1.1M. You don’t have to go to N.Korea and ask your brother-in-law that never was for his forgiveness for not marrying his sister. You just file a Chapter 7 in Los Angeles and you discharge or wipe out the $1.0M lawsuit while keeping intact your 401K of $1.1M. Sounds good, right? No; sounds great in fact. Only in America can you do this. But will it stop your brother-in-law from aiming his nukes at LA? Well, that’s another story.
If you need debt relief, set an appointment to see me. I will analyze your case personally.
“I WILL SAVE THOSE WHO LOVE ME AND WILL PROTECT THOSE WHO ACKNOWLEDGE ME AS LORD…I WILL REWARD THEM WITH LONG LIFE;” PSALM 91h
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Disclaimer: The foregoing is an expression of opinion and is not meant to be legal advice to any reader. There is no attorney-client relationship established by this article with the reader. If you want to discuss your situation, you have to set an appointment to consult with the attorney. The first general consultation is free.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave, Mailstop 58, Building A-1 Suite 1125, Alhambra, CA 91803 or at 20274 Carrey Road, Walnut, CA 91789.