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Facing Bankruptcy? Weigh Your Options.

Contributed by mm | April 21, 2005 9:35 PM PST

If you are unfortunately in a financial rathole, make sure you are up to speed on bankruptcy-related news. For one, President Bush just signed a new bankruptcy bill into law, making bankruptcy much harder. For another, Supreme Court ruled that IRA is eligible for creditor protection in a bankruptcy proceeding. Of course, bankruptcy lawyers will surely help you to navigate the complexity of a bankruptcy filing.

Let's study both news a little bit. For the new bankruptcy law, which will take effect six months from now, financially handicapped people have less chance to wipe out the entire debts. As summarized by MSNBC:

"[t]hose with insufficient assets or income could still file a Chapter 7 bankruptcy, which, if approved by a judge, erases debts entirely after certain assets are forfeited. Those with income above their state�s median income who can pay at least $6,000 over five years � $100 a month � would be forced into Chapter 13, where a judge would then order a repayment plan."

Regarding the Supreme Court ruling, it cleared most of the cloud over IRA's status in bankruptcy proceedings, but Financial-Planning.com's professional analysis highlighted the limited scope of the decision:

"The bottom line for advisers is that the Supreme Court�s favorable allowing creditor protection for the Rouseys� IRAs is not a panacea for IRA creditor issues. The protection is not akin to ERISA-level protection, will only apply in a limited number of states, and will only apply to the extent reasonably necessary for support (which is still determined by the bankruptcy courts on a case-by-case basis). Consequently, decisions to complete IRA rollovers from ERISA-protected retirement plans must still be made carefully, depending on a client�s particular facts and circumstances!"

So, what should you do if you know you cannot dig yourself out of your debt? Two advices:

1. Take quick action. After six months, more strict rules will apply and it will be less likely to remove most of your debt burden.

2. Find some cash and fund your retirement account. 401(k), 403(b) and alike will be the best, but if these options are not available to you, at least stuff some cash in your IRA, which, based on certain conditions illustrated in the Financial-Planning.com analysis, will be shielded from your creditors. You can put up to $4,000/person for this year (higher if you are over 50). (Don't use Roth IRA, which is not protected the same way.)

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