Chapter 13 is one of the two main ways consumers can climb out of debt through bankruptcy, the other option being Chapter 7. Technically, a Chapter 13 bankruptcy will have little to do with whether or not you can retire. However, if your retirement doesn't allow you to fulfill the terms of your Chapter 13 bankruptcy, then you may not be able to retire during a Chapter 13 bankruptcy.
Chapter 13 Requirements
The reason Chapter 13 might have a bearing on your retirement plan is the nature of the bankruptcy itself. Unlike a Chapter 7 bankruptcy, which usually ends in a few months, a Chapter 13 bankruptcy lasts years, during which time the court puts you on a repayment plan. In order for the court to approve your Chapter 13 plan, you must demonstrate that you have enough income to satisfactorily complete the plan. If you are retired, you may not have sufficient income to complete the plan.
For most individuals, retirement results in a drop in income. However, if you established a Chapter 13 payment plan before you retired, you must maintain the same level of payments to keep your bankruptcy case in compliance. Without additional income in retirement, such as a part-time job, an inheritance or a pension plan, you may end up defaulting on your plan. Since defaulting on your plan could throw your entire case into jeopardy, make sure you will have sufficient income in retirement to keep making Chapter 13 payments.
Consequences of Non-payment
If you can't make your monthly Chapter 13 payments, you will be considered in default of your plan, as with any creditor. The consequences of defaulting on a Chapter 13 plan are harsh. The court will usually dismiss your case and withhold its protection, allowing creditors to pursue you for repayment of your outstanding debts. You may be able to switch to a Chapter 7 bankruptcy, but that may result in the liquidation of your assets.
Prior Chapter 13
If you are not in a current Chapter 13 bankruptcy when you retire, but simply have an older Chapter 13 case in your credit history, you should have no restrictions whatsoever about retiring. While a Chapter 13 can damage your credit report, as long as you are not looking to find new credit upon retiring, the bankruptcy should have little effect at all on your life.
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- United States Courts: Chapter 13 Bankruptcy
- NOLO: An Overview of Chapter 13 Bankruptcy
- Experian; Credit Advice — Bankruptcy Remains on Your Credit Report for up to 10 Years; Maxine Sweet; August 2010
- Bankruptcy Law Network; How Do You Know if Your Chapter 13 Is Dismissed and Is There Anything You Can Do?; Jonathan Ginsberg