I was reading Dave Ramsey’s column in a recent edition of the Erie Times-News and he was asked about using 401(k) contributions to pay down debt instead of contributing to one’s pension plan. Ramsey's thoughtful answer in this case was to advise the reader to halt the contributions and pay down the debt first. In this case, it appeared to be sound advice.
But for many of our clients, stopping $150 per month contribution into their retirement plan is not going to get the job done. Maybe the credit card debt is $20,000, or much more. It is in these situations that you are better off getting advice from someone who has looked at these types of matters before, such as the attorneys in our office at Steidl and Steinberg.
Let’s say that the situation is as I described above: $20,000 in credit card debt, minimum payments of maybe $500 per month, which is mostly going to interest, and $150 per month going into a retirement plan. One of the questions we are going to ask you is simply, is there enough left over to pay your normal monthly expenses, such as food, housing, utilities, clothing, insurances, transportation costs, kid’s expenses, etc.? And if not, then perhaps taking the $150 per month and adding it to your credit card payments isn’t going to help enough to turn things around.
In that situation, we may advise you as to your bankruptcy options, and there might be more than one, say both Chapter 7 and Chapter 13. Maybe only one of these would be best for you, or none of them.
But what will happen to the money in your pension plan now? In virtually all cases, your pension is completely protected by the United States Bankruptcy Code. Congress made it clear that it wants most of those seeking bankruptcy relief to keep their pensions intact.
So stop worrying about your pension if you are considering filing for bankruptcy. And start getting some competent advice.