Why Declare a Chapter 7 Bankruptcy? Turn a Tax Killer Into a Tax Saver!
Should I file a Chapter 7 bankruptcy? According to Chapter 7 Bankruptcy Attorney Michael H. Raichelson, that is the question most often asked by his clients. The answer depends on your assets, age, earning capacity, current earnings, physical health, and emotional well-being.
As a rule of thumb, if you cannot pay off all of your unsecured debt (i.e., credit cards, personal loans, judgments, etc.) within three to five years, you should seriously consider filing a Chapter 7 bankruptcy. The urgency to file a Chapter 7 bankruptcy is even greater the older you are in that the older you are, the less time you have to save for retirement.
Every year you spend making just the minimum payments on your credit cards is a year you can never get back, resulting in thousands of dollars in losses. Take the typical client that we will call “John Owe”, who owes $30,000 in credit card debt. Let’s assume that the average interest rate for all of John Owe’s credit card debt is 20%. Under these circumstances, John Owe is paying $6,000 per year in pre-tax dollars in interest alone. In other words, he must earn from $7,000 to $9,000 before taxes to service just the $6,000 in interest on his debt. By eliminating this credit card debt in a Chapter 7 bankruptcy, John Owe is now in a position to save this money immediately.
Tax Benefit of Declaring Chapter 7 Bankruptcy
If John Owe is 50 years old or older, he is better off depositing this $6,000 in an IRS qualified retirement account such as an IRA than paying interest on his credit card debt. The math is simple — by the time John Owe is 65 years old, he will have saved $90,000 for retirement. This straightforward calculation does not consider the positive tax savings that would result from depositing his savings into an IRA — contributions to an IRA come off his yearly income, thereby reducing his total tax liability. It also does not consider the potential return on investment that he is likely to receive when savings is put into a deposit account. If John Owe simply earns a 5% return on his investment and has an adjusted gross income of $40,000 per year, he would have $146,000 in the bank by the time he is 65 years old. If John Owe waits until he is 55 years old (i.e., delays just five years) before making his $6,000 annual contribution, he would have saved only $85,824, thus losing $60,176 for retirement!
No one is going to help you save for retirement, especially not the credit card companies. The math is clear — filing a Chapter 7 bankruptcy turns a tax killer into a tax saver; delaying the filing will cost you tens of thousands of dollars.