UNEMPLOYMENT claims nationwide have significantly spiked due to the lockdown which has resulted in the shutdown of the U.S. economy. Millions of people have lost their jobs because small businesses are not operating. The restaurant and travel industries, which are the two major employers provided by small business, have been knocked down by the virus. Certainly, the federal government has brought in a lot of liquidity into the market by providing, among others, the $2 trillion stimulus. Your $1,200 check should be in your checking account by now if you are receiving social security. Everybody else will receive their checks in the mail with the name of the current president on it. He wants you to think of him when you receive your check.
Unemployment checks will not be coming to you as fast as you want. The system is overloaded. But you will receive some form of compensation to replace your salary via the stimulus structure. I don’t know how fast your replacement salary will get to you and I don’t know how long that will be good for, a couple of months at least, maybe six. In the meantime, the president is pushing for the reopening of the economy in phases. He came out with guidelines for the reopening of the economy today, April 16. In another two weeks, by May 1st, individual states will decide on their own how, if and when they will reopen.
There’s no vaccine yet. So everything is still uncertain at this point in time. Hopefully, those who lost their jobs during the lockdown will start getting their jobs back in due time. But right now, bills have to be paid. The rent or mortgage has come due. Those with retirement accounts are tempted to use these accounts as temporary funding; more so because the CARES Act has allowed individuals to withdraw their retirement accounts without penalty due to the pandemic.
There are two ways to use a retirement account: You can liquidate or borrow from it. But the real question is should you use your retirement account to tide you over? Well, the answer is NO, you should not. Why not? Because it’s a RETIREMENT account, not a credit line. When you retire, you are going to need your RETIREMENT account because your income will decrease substantially. Further, it’s not easy to replenish your retirement account once you liquidate or borrow against it. That’s just a fact.
So what do you do to tide you over during this pandemic? Instead of using your retirement account, use your credit cards and other unsecured credit lines! Why? Because after this pandemic is over, you can wipe out the credit cards with a Chapter 7, and at that time your retirement account will still be whole.
Let’s give an example of how this works: You lost your job. You have $100,000 in your 401K. You are waiting to get rehired but you have to wait until the end of the year before you get rehired. In the meantime, your monthly expenses are $5,000 a month.
Between now and the end of the year, you will need $40,000 to survive. Don’t use your retirement account. Use your credit cards or unsecured credit lines to tide you over. By the end of the year, you will have $40,000 of credit card debt, which you used to pay your monthly expenses between now and the end of the year.
You will owe $40,000 in credit cards. Hopefully, by that time you get your job back. If you qualify for Chapter 7, you can wipe out the $40,000 of credit cards, and you can exempt your $100,000 from the retirement account.
Of course, not everyone will qualify for Chapter 7. Qualification for Chapter 7 depends on many factors. If you can’t qualify for Chapter 7, you can do Chapter 13 to allow you a reasonable repayment plan which may be a partial payment of the $40,000 of credit cards over 60 months without interest.
On the other hand, if you use your retirement account, at the end of the year your retirement account will be down to $60,000, and with the wild swings of the stock market nowadays, maybe it will be down to zero.
Caution: Not everyone will qualify for Chapter 7. So think about this option seriously. You don’t want to end up losing your retirement account just to survive the next six to eight months because of this nasty virus. Disclaimer: the foregoing situation is not meant as legal advice.
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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 20274 Carrey Road, Walnut, CA 91789 or 1000 S. Fremont Ave., Mailstop 58, Building A-10 South Suite 10042, Alhambra, CA 91803.
