Dear Bankruptcy Adviser, I have a friend who is 71 years old with only $8,000 in savings and more than $15,000 in credit card debt. He's living in a worthless trailer and drives a clunker. At his age, it's ridiculous to think he'll ever be out of debt. So, in light of that and the weight of the debt, what are his best options? Should he file bankruptcy and protect the cash he does have in an individual retirement account? -- Stephen
Dear Stephen, Thank for you taking the time to write to me. Unfortunately, it is hard to respond to your question without knowing more. I would tell him that he first must consult with a bankruptcy attorney in the state in which he currently resides.
While you are right in that he does not appear to have many assets, he may have too much cash for a Chapter 7 bankruptcy at this time. While the underlying bankruptcy laws are the same throughout the country, what you can and cannot protect varies from state to state. Each state legislature has established its own bankruptcy exemptions that can vary dramatically.
For example, in some states, a person filing bankruptcy can protect no more than $300 in the bank. In others, the filer can protect more than $26,000 in cash, vehicle and trailer equity. Obviously, filing bankruptcy and losing all that money would not make any sense, so he would need to know whether he could protect the $8,000 in savings.
You also ask if he can protect his cash by placing it into an IRA. I believe the law does not allow that option. You must contribute "earned income" into an IRA. Earned income is defined as money received from wages or taxable income (such as investment dividends) in the same year that you contribute to the IRA.
In the facts you give above, it appears this 71-year-old man may be retired and has some savings. He may not have earned anything in the past year, which means he would not be able to place some of this money into an IRA.
Had this individual called me at my office, I would discuss his options, see what I could do to legally protect any unprotected assets and plan for a smooth case. So at this point, while I agree that he ought to seek the guidance of a bankruptcy attorney, right now, I don't know whether bankruptcy protection could make matters worse for him. Good luck!
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