Dear Bankruptcy Adviser,
I  am retired and on Social Security. I also have a 401(k) worth about $60,000. I owe about $25,000 in credit card debt. I own nothing worth more than a 5-year-old car. Should I pay off my debt? I paid nothing for several years trying to keep my house. Or do I file for bankruptcy? Wouldn't my retirement money be seen as an asset and therefore be open to seizure?
-- Michele

Dear Michele,
I think this type of question is worth answering for a couple of reasons. First, I can discuss your legal options and second, I get to give my opinion on your moral dilemma. And that dilemma is one that is the more interesting part.

From a legal standpoint, you state you own nothing but a 5-year-old car, some 401(k) money and about $25,000 in debt. I don't have information on your income or monthly expenses, so I cannot comment on your monthly budget, but you are very likely eligible for Chapter 7 bankruptcy.

The 401(k) money, as long as it remains in that account at the time of filing, is exempt. That means the funds cannot be seized to pay your creditors. You can file your case and take the money out after your case is over. It is important that you do not touch that money until the court closes your bankruptcy case, otherwise the funds could be in jeopardy.

That means you would have the ability to wipe out the credit card debt but keep the 401(k) money and the vehicle.

From a moral standpoint, people reading this may be rather irritated. You used the cards and have the money to pay the debt back, so pay it back! Don't make the rest of us suffer because you want the easy way out.

This probably will not be considered to be a shocking statement from a bankruptcy attorney, but I don't think this is a difficult choice. You ought to file bankruptcy. Wipe out the credit card debt; keep the retirement income and the vehicle. Yes, I know, I am a bankruptcy attorney and this is how I make a living, so obviously I would tell you to file bankruptcy.

Maybe there is some truth to that, but I actually have another reason.

We are a consumer-based society. We need you buying things. If you are burdened by trying to pay down this debt, you will not use your retirement income to buy new clothes, go to dinners, take vacations, etc. And that hurts us all even more. While I am not saying to file bankruptcy for the purpose of running up more debt, I am saying that I believe society is benefited more by your ability to spend money and not by paying interest on things you already bought.

Remember, most credit card and finance companies run a very profitable business. They will survive a few defaults and do not necessarily have to charge more in interest and fees to everyone else. I believe that the accounts in default are not the reason the credit card companies charge interest and fees. They do so because they are in the profit business, and charging more for a service you want makes them more money. So I do not believe other credit card holders are worse off because you wipe out this debt in bankruptcy.

Good luck with your decision.

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