Tax Considerations

• When you request a hardship withdrawal from a retirement account such as a 401k plan, you generally must pay taxes on the proceeds, warns the Internal Revenue Service. However, if you file any type of bankruptcy, you do not pay taxes on the canceled debts. Also, you can keep all of your retirement accounts regardless of your bankruptcy status unless you committed fraud to fund them.
  
  

Chapter 7 Basics

• If you economically qualify for a Chapter 7 bankruptcy, it can give you a virtually clean financial slate, according to the book “How to File for Chapter 7 Bankruptcy.” Chapter 7 permanently eliminates most of your pre-existing debts, excluding recent tax bills, court fines and most federal student loans. Once a judge finalizes your Chapter 7 case, you can get new credit and also use your income and assets as you wish. However, the fact that you filed Chapter 7 will damage your credit rating for 10 years and will make it difficult to obtain new credit at reasonable interest rates for a while.
  
  

Chapter 13 Basics

• If you have regular income but fell behind on your debt payments, consider Chapter 13 before pulling money out of your retirement accounts. Chapter 13 offers a partial debt repayment plan that takes three to five years to complete. But while you’re repaying your bills under Chapter 13, you cannot legally get any new credit without a judge’s permission. Also, you risk turning over all or part of your income tax refunds during your Chapter 13 plan. Your tax refunds would go toward creditor repayment unless you prove a hardship such as medical bills or vehicle repairs.
  
  

Chapter 11 Basics

• Self-employed people or business owners can preserve their assets, including retirement accounts, while partially repaying creditors under Chapter 11, according to the United States Bankruptcy Court. However, you must hire an attorney to file Chapter 11. Only in Chapter 11 can you combine repayment of business and personal debts. Even though Chapter 11 gives you a chance to retain your business and its assets, if you cannot restructure your finances, your business cannot stay afloat.