It happens — unpaid bills stack up, debt climbs, and before you know it, you begin missing payments. Before long, you may get calls from debt collectors.
If this sounds familiar, you may have considered bankruptcy. Who wouldn't want to wipe the slate clean with a fresh start? Of course, bankruptcy isn't quite that simple.
First, you have to qualify, and depending on which type, it may require selling assets. If you have money in an account like a health savings account (HSA), it could be at risk.
Not all bankruptcies are the same
The term bankruptcy is often used to describe someone who is offloading debt or making a plan to repay it. While it's easy to get the different types confused, they are in fact very different. Here are the basics of Chapter 7 and 13, the two types most often filed by individuals.
Chapter 7 - This type of bankruptcy allows you to discharge all debts, with some exceptions like student loans or unpaid taxes. Depending on where you live, some of your assets may be off limits. Your case trustee sells everything else to pay for your debts. Your balance is then wiped clean. Discharging debt through a Chapter 7 bankruptcy has a major impact on your credit. It doesn't fall off your report for 10 years.
Chapter 13 - This chapter allows you to restructure your debts and pay them off over time — usually 3-5 years. One of the biggest advantages is keeping your home. Another perk is the ability to reschedule payments. Often, this reduces your payments and makes them more manageable.
In other words, Chapter 13 is a lot like a consolidation loan. You make payments and your trustee distributes money to your creditors. In the eyes of the credit bureaus, Chapter 13 is better than Chapter 7. But it will still take seven years before it's off your credit report.
Filing for bankruptcy is a major decision. In fact, you can't even begin the process until you've worked with a certified credit counselor. When you're ready to explore your options, National Foundation for Credit Counseling (NFCC) is a great place to start.
Assets that are exempt from bankruptcy
If you have started exploring either Chapter 7 or 13 bankruptcy, your first question is probably, "how much stuff can I keep?" Unfortunately, there isn't a simple rule of thumb that works for all situations. Bankruptcy law decides which assets are exempt. Some states let you pick between federal or state law exemptions. Others will stick with state regulations.
Your best bet is speaking with a local bankruptcy attorney. They will have an in-depth knowledge of exactly what is exempt in your state — and if your HSA money will be seized to pay off your debt.
Don't assume your health savings account is safe
As legal research points out, bankruptcy law does allow some exemptions related to health and health benefits. But, unfortunately, federal law isn't clear about health savings accounts (HSAs). The federal government does offer protection for most retirement accounts. But HSAs don't get the same treatment.
There have been at least four cases where bankruptcy courts have ruled against keeping an HSA safe. It's possible courts could rule the same way for you too. To be sure, seek advice from a local bankruptcy attorney.
Get professional bankruptcy guidance
Filing for bankruptcy is a big decision that will impact your life for years to come. If you're in the position to consider it, chances are your finances are in rough shape. It may feel overwhelming, but it's never too soon to contact a certified credit counselor. Your situation may be better than you think, and if not, you'll be in good hands.
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