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Introduction:

It is important to understand how your current financial decision about debt relief will affect your future financial freedom when you are deciding between your debt relief options. One of those financial decisions is how your repayment of debt can affect your retirement savings. What do I mean by this? Let’s say you qualify under the means test for a Chapter 7, but you are deciding whether you should do debt settlement or debt management.

With debt settlement and debt management, you will end up paying a certain amount of money until the end of term regardless of whether you should be doing Chapter 7. With Chapter 7, you are able to eliminate your debt oftentimes within 90 days, and you can use this fresh start to start investing in your retirement.

How can you calculate what you can save? Steve Rhode’s “What Repaying Your Debt Will Cost You in Retirement – Calculator” from GetOutOfDebt.org was extremely compelling and helpful as I had not thought of this idea before.

How The Calculator Works:

Steve’s calculator was very easy to use.  There are only 6 points of information that it requests and he provides helpful explanations for each of these inputs:

  1. Current Age: Enter your current age.
  2. Monthly Payment: Enter monthly payment of debt plan.
  3. Monthly Payment After Payment Plan: Enter any payment you expect to make on a monthly basis into your retirement plan after you get out of debt. Leave this as 0 if you just want to see the future cost of lost retirement from a repayment plan.
  4. Length of Payment Plan: Enter the number of years the repayment plan will take.
  5. Interest Rate: Enter the rate of return you anticipate your retirement plan to have.
  6. Estimated Retirement Age: The age you anticipate retiring at.

What is the Result?

The result is astonishing, and shows how Chapter 7 bankruptcy can be a compelling option for those who are unable to afford their debt and need debt relief. For my example below, I have a future retirement loss of $460,845.01 for just a 5 year program, assuming a 10% return, a 5 year program and a monthly payment of $300. That is a huge loss.

Should you do a Chapter 7 if you qualify and have a large, unaffordable debt burden?

For many, Chapter 7 bankruptcy is the right choice and the relief you need. I like how Steve Rhode provides insight into how bankruptcy helps in his article, “The Incredible Healing Power of Bankruptcy.”

I also asked this very question to a close friend who owns and operates a bankruptcy firm. I believe the answer in most cases is “Yes, a Chapter 7 can be extremely useful”, but he did mention that it depends on each individual’s situation. For example, he stated that if you have a  high value asset such as a boat and your debt amount owed is less than the value of the asset and you are already behind, then debt settlement can be a very good option.

Post Author: Ben

Ben is a co-founder and writer for Ascend Finance. Before Ascend, Ben held various executive roles at personal finance companies. In his free time, Ben enjoys spending time going on adventures with his wife and two young daughters.

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