Houses can be an emotional trigger in bankruptcy. “When they talk about losing your home, a lot of people are blinded by that fear and they can’t see the financial consequences of doing something in a certain way because they absolutely don’t want to lose the home,” Wade said. “In many cases, the smartest thing to do is let the home go.”
“The biggest mistake that clients make [regarding] bankruptcy is that they don’t realize the long-term impact in getting credit, reputational risk and publicity,” said Brent Lipschultz, partner in the personal wealth advisors group at EisnerAmper, New York.
“Seek financial planning assistance. For example, in 2020, one can borrow from retirement plans or an IRA under the CARES Act, avoiding the penalty if younger [than] 59½ and paying tax over three years on distribution or no tax if the money is put back into the plan,” Lipschultz said. Restrictions regarding being affected by the pandemic do apply.
Wade, who discouraged tapping an IRA or 401(k) to pay off debt, said that Chapter 7 offers individuals a way to get a discharge on debts; a corporation does not get a discharge. “One thing you can do is simply give the corporation away,” Wade said. “Those debts are unpayable because the corporation is gone.”
He also suggested establishing residency in a state with a homestead exemption, though many restrictions to that exemption apply.