Question: My wife and I are in debt that I no longer can tolerate. I am retired and have burned through my 401(k) and my annuity to pay the $6,000 a month in mostly credit cards and home mortgages.
What are my options? I don't think we qualify for Chapter 7 bankruptcy. What about Chapter 13, and what does that entail?? Do I need an attorney? How do I keep creditors from calling me day and night?
Answer from James Caher, co-author of Personal Bankruptcy Laws for Dummies
"Bankruptcy is definitely something you should look into, since it looks like you're sinking fast and probably wasting your retirement paying debts that you might be able to eliminate in bankruptcy. But there are many, many things to consider.
"I suspect that you may very well qualify for Chapter 7 (the one that does not involve a repayment plan of any kind), since you are living on retirement income. But this depends on whether your income exceeds the median income for your state, which is probably around $4,300/month before taxes. Social Security income does not count. Even if your income exceeds the median, you may qualify for Chapter 7, but you would have to pass the Means Test.
"You might not want to file a Chapter 7 if the equity in your home exceeds the allowable exemption in your state. For example, assume that your home is worth $200,000 with mortgages totaling $150,000, leaving $50,000 in equity (the difference between the value of the property and the mortgages). If your state allows a homestead exemption of $50,000 or more, you won't lose your home in a Chapter 7 -- provided you keep up with your mortgage payments.
But if your state allows, say, $15,000 for a homestead exemption, a Chapter 7 trustee could sell your home, pay off the mortgages, pay you $15,000 and pay the rest to creditors.
Chapter 13 is different. Property is not liquidated. Instead, folks pay what they can afford for the next 3-5 years, and remaining balances are wiped out. If you are behind on your mortgage, you can use Chapter 13 to catch up on back payments by stretching them out over 3-5 years while continuing to make regular payments going forward. Yes, you should consult with an experienced bankruptcy lawyer for advice tailored to your particular situation, but you can get a very good idea about your options from our book, Personal Bankruptcy Laws for Dummies.
Question: I am thinking about opening a 529, but don't know if it's currently worth it, considering what little interest most accounts are earning these days. How does it work? If it's not worth opening one, what should I do instead to save for my daughter's college expenses?
Answer from Frank Armstrong III, author of The Retirement Challenge (FT Press)
There are lots of good ways to save for college expenses, including the Coverdale IRA, 529 Plans, Prepaid College Tuition Plans, Gifts to Minor's Act (UGMA Accounts), Withdrawing Contributions from Roth IRAs, and Low Cost Tax Efficient Mutual Funds (preferably index funds). For more, see the article from the Financial Planning Association, Grandparents Can Help Grandkids With College Tuition.
Most 529 plans invest for total return rather than for interest. That means they hold both stocks and bonds, and we would expect the return over time will exceed guaranteed accounts like CDs, Treasury Bills and bonds alone. Higher potential returns mean you will have to save less to make your goal, or your savings will accumulate to a higher amount.
If you are considering a 529 plan, make sure it's economical, the investments are well diversified and the risk level is reduced substantially at some point before you will need the funds for your education expenses. After all, another meltdown like we saw in 2008 just before the funds are needed can ruin your investment plan.
Each state sponsors one or more plans with investment firms. Costs and design vary from plan to plan, so you will need to do a little homework. A good place to start is Collegesavings.org, which has information on every available plan.
How you save for college may come down to personal choice. But it's important that you start now. The sooner you start, the more time you will have for your accumulated savings to grow, and the easier the task.
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