Senior Citizens & Bankruptcy

Bankruptcy is a legal proceeding that could provide relief when a person can’t repay debts. Consider bankruptcy a legal life preserver for those drowning in debt.

Chapter 7 bankruptcy is one of the two main types of personal bankruptcy, and the most commonly used. It is referred to as “liquidation bankruptcy,” which means the court will liquidate non-essential assets and pay off as much of your debt as possible. Items necessary for living are considered exempt and include a car (have to get work), clothes, tools or equipment necessary to work and (frequently) your house.

Chapter 13 bankruptcy is more complex because it is a reorganization of finances and works much like a debt consolidation plan. You and the court work out a payment plan for your debt that will last three-to-five years. In that time, assets are protected from foreclosure and repossession as long as you execute the plan.

When might a senior citizen be forced to consider bankruptcy? If some or all of these are true:

• To eliminate debt, you don’t want heirs to inherit.
• If the debt is severe enough to hurt you financially and can be wiped out in Chapter 7.
• If medical debt is negatively impacting your life.
• If you have overused credit cards and repaying that debt has made things difficult.
• A divorce or separation leaves you in financial straits.

All situations are unique, but for bankruptcy for seniors – especially Chapter 7 – works best for those who do not own a house or do not have significant equity in a house. Those who own a house outright or have significant equity could be forced to use the equity to pay creditors, or to sell the home.

Medical bills and the debts they bring can be especially burdensome to seniors. Credit card debt is another issue for seniors, compounded by the fact many are on a fixed income. That fixed income also can cause issues if those who are approaching their senior years have not prepared and planned ahead to ensure their “golden years” are taken care of.

While seniors make up only 8% of total bankruptcy filings, the number of those filing aged 55 and older has doubled in the past 15 years. Those 55 and older account for 20% of all bankruptcy filings.

“Bankruptcy is a drastic step and should only be considered as a last resort,” said Tom Kelly, Chief Technology Officer of  LifePart2. “(However) bankruptcy can be a way to get a fresh start financially. It’s important to weigh all of the consequences before making a decision.”

Should I File for Bankruptcy as a Senior Citizen?

Debt can be a giant problem, but seniors should think long and hard about whether bankruptcy is the right step. In many cases, it’s not.

“It is important for a senior to talk with a bankruptcy attorney about the type of debt that is allowed to be wiped out and what type of assets are exempt from a bankruptcy proceeding,” said David Reischer, Bankruptcy Attorney and Debt Specialist at LegalAdvice.com.

Among the questions that should be considered:

• Are most of my assets necessary for living? Social security, retirement income and benefits are all essential for seniors to live. If those assets are all you have, filing for bankruptcy isn’t wise because there is nothing for the court to liquidate to settle your debt.
• Are my assets too valuable to lose? If you own extra property, have significant equity in a home, or income that is not protected from creditors, those could be at risk if you file bankruptcy. It’s wise to consider what’s at stake if you file.
• Can your debt be discharged (erased) in Chapter 7? Some (but not all) of those debts that can be discharged include credit cards, medical bills, personal loans from friends or family, auto accident claims and past-due rent.
• Would Chapter 13 help you catch up on past due home or car payments? It could. If so, it’s worth considering, but careful study is needed first.
• If you have to give up some personal property, will you be able to discharge enough to reduce the debt to make the cost of filing worthwhile? Lawyers are not free. If discharging assets saves only a small portion of the debt, it might not be worth the cost of filing.
• Can you pass the means test to file Chapter 7? Chapter 7 is available only to those who pass the “means test” meaning their income is below the median income for the state they where they live.

Is Filing for Bankruptcy Necessary?

Bankruptcy isn’t always the best approach for senior citizens.

Daniel Chan of Marketplace Fairness points out that it’s important to think through other options before bankruptcy.

“Like credit counseling or debt consolidation,” he said. “Bankruptcy should only be considered if there is no other way to pay off debt.”

Credit counseling as an alternative to bankruptcy is a wise first choice. Sitting down with a counselor from a nonprofit agency can help you assess your debt and income and map out the best strategy to deal with it. What questions would be discussed that might lead to seniors filing for bankruptcy?

• Is yours the kind of debt that can be discharged in Chapter 7?
• If you are behind on your home or car payments, will bankruptcy help you catch up?
• Can you discharge enough debt to make the cost of bankruptcy worth it?
• Can you pass the means test for Chapter 7 or can you afford monthly payments for Chapter 13?

If you do choose bankruptcy, it should be done with careful thought and analysis. Pre-bankruptcy credit counseling is a requirement. This counseling may lead you to consider one of several debt relief options that prevent the need to file, including the chance of working out a debt management plan.

Costs of Filing for Bankruptcy

The cost of bankruptcy includes paying court fees, and fees for a lawyer. Hiring a bankruptcy attorney is not inexpensive, but it is recommended.

Court fees for Chapter 7 are $338 and $313 for Chapter 13.  Attorney fees for Chapter 7 average between $1,000 and $3,500, and for Chapter 13 between $2,500 and $6,000. As in any legal case, the more complicated your problem, the more time required from the lawyer and the more you will have to pay.

It is possible to file a low cost bankruptcy. An affordable bankruptcy attorney could be found in various places, including the state bar association, the American Bankruptcy Institute web site, online bankruptcy associations and legal aid and legal clinics. Some attorneys may even work pro bono.

Are My Assets Protected?

Some assets held by seniors are protected in bankruptcy. Most important of these is retirement income.

“Many seniors depend on retirement accounts when they are no longer working, and a good portion of those are protected in bankruptcy proceedings,” Reischer said. “For the most part, tax-exempt retirement accounts are protected in Chapter 7 by federal law, and that includes 401-Ks, IRAs and defined-benefit plans (such as a pension or VA benefits).”

It’s important to understand these bankruptcy exemptions that apply to seniors. Because they are protected, you will not lose them if you file.

What Happens to My Home?

 This is an important question, and the answer is: It depends, but for many seniors it’s a scary situation – especially when filing Chapter 7.

“Seniors should be aware of the risks associated with bankruptcy,” said Linda Chavez, Founder and CEO of Seniors Life Insurance Finder. “They may lose some of their assets, including their home.”

In Chapter 7, the bankruptcy trustee can sell your home if you have significant equity in the home, or if you have more equity than your state’s homestead exemption. This is a difficult situation because seniors often have paid off a significant portion of their home, which gives them a lot of equity.

Homestead exemptions vary by state, so it’s important to know the exemptions in your state. That’s because any amount of equity more than the homestead exemption in your state cannot be protected in bankruptcy. If, for instance, you have $150,000 in equity on a $200,000 home and the homestead exemption is $50,000 in your state, you have $100,000 more in equity than the exemption.

Obviously, this kind of situation can lead to problems if you file Chapter 7. If you have paid off your home entirely, a common situation with seniors, the bankruptcy trustee could sell your home to pay off debt, though a lawyer will fight to prevent that from happening.

A situation like this has to be seriously considered, and preferably discussed with a lawyer.

In a Chapter 13 filing, you keep your house as long as you make regular mortgage payments along with the regular payments set up by the court to settle the debt. Chapter 13 also has a method to work out catching up if you are behind on payments on your home.

Retirement Accounts

Most retirement accounts are protected in bankruptcy. In Chapter 7, almost all tax-exempt accounts are protected, including IRAs and 401-Ks, and pension plans. The only qualifier is when your IRA accounts total more than $1,512,350. Amounts above that are not protected, but since that figure is so high many seniors will not have to worry because plenty will remain to take care of future needs. In Chapter 13, you keep all your assets, so all retirement accounts are protected.

The above applies to money in the IRA or 401-K accounts themselves. If you have set up a plan to receive monthly payments from your IRA or pension, that money will be considered as income. In the Chapter 7 filing, it is considered in the means test. Any portions necessary to keep you alive and safe will not be considered but amounts above that will. In Chapter 13, that income will be considered when determining what portion of unsecured debt must be repaid.

Social Security Income

Social Security income is protected – with one important qualifier. To ensure that money is protected, it must be kept in its own account, separate from other money. Once you blend Social Security money with savings or pension/IRA income, it is considered part of the bankruptcy proceedings.

There are ways to avoid this situation if it’s too late and you’ve already “mixed” money. An attorney could provide valuable help. Social Security is not considered in the means test for Chapter 7 but must be disclosed.

Are My Other Incomes Protected?

If you are still working after turning 65, that income as well as investment income is part of the bankruptcy proceedings. Income that is protected include Keoghs, profit-sharing plans, and defined benefit plans. If your money is in an ERISA account – an employer-sponsored plan that includes most retirement accounts like IRAs or 401-Ks – that money is protected.

Debts That Can Be Discharged via Bankruptcy

Certain debts can be discharged in bankruptcy, specifically unsecured debt, which means debts that have no collateral behind them. For example, medical debt is unsecured. A home loan is secured.

Among the debts that can be discharged in Chapter 7 bankruptcy:

• Medical debt
• Credit card debt
• Utility bills
• Past due rent
• Personal loans

While student loans cannot be discharged, it’s highly unlikely any senior would still be paying a student loan. If you are because you went to college late in life or because you took out a loan to help a grandchild, a smart attorney could help address the situation.

Non-dischargeable Debts

Secured debts are non-dischargeable in bankruptcy. Among them:

• Home loan
• Car loan
• Home equity loan

Mistakes to Avoid

Remember this rule of thumb: Even the simplest of bankruptcy cases can be complicated. It’s easy to make a mistake when filing or preparing to file for bankruptcy. This is why it’s typically recommended an attorney at least be consulted, and why it’s a wise step to allow a nonprofit credit counseling to assess your situation.

To help avoid mistakes before filing for bankruptcy, consider this list of possible pratfalls;

• You don’t consider other options first: Medical bills may be negotiated by calling the provider. A credit counselor can offer sound advice when assessing debt-relief options for your situation. Debtors may allow you to address debt with payment plans. It’s always best to consider other less expensive and less complicated options before bankruptcy.
• Take care if selling assets: Age limits what you can take from a retirement account. A house may be protected in bankruptcy, but if you sell it, that money isn’t protected. Again, a nonprofit counselor can help.
• Not being truthful about your assets: A court will never look favorably on those who try to cheat the system.
• Giving assets to family members: Doing so is a red flag that causes the court to ask many questions.
• Borrowing to pay bills: Adding debt to existing debt compounds problems, it does not solve them.
• Using a credit card to pay debt: This only speeds the downward spiral of debt. Avoid at all costs the urge to use a credit card to pay your debt.
• Not consulting an attorney: The first meeting is free. Listen to the options presented and what it will cost to pursue those options before deciding whether you can afford one. It may be worth the money. Attorneys know the intricacies of the system, the ins and outs. Hiring one may be painful initially but may end up saving money in the long run.

How to Get Started with the Bankruptcy Process

Legal proceedings bring nervousness, but the bankruptcy process is not that scary. An individual case may be complicated, but the steps are straightforward. They are:

• Assess your situation: Gather your information. Debts, debtors, income, assets, savings, etc.
• Talk to a nonprofit credit counselor: Get an honest opinion from someone who can assess via pre-credit counseling whether you can take steps to avoid bankruptcy.
• Find a bankruptcy attorney: Good ones are out there. They are affordable.
• File with the bankruptcy court: Pay attention to proper paperwork. An attorney can help. Pay your fees when you file.
• Rebuild your credit: After filing, pay attention to spending and budget. Do not overspend, and if you charge something, pay it in full and on time. Bankruptcy will affect your credit score, but the best way to build it back up is by being responsible.

What Happens after I File for Bankruptcy?

It’s important to know what happens after filing for bankruptcy.

• Take a breath: Once you file creditors may not contact you. This provides relief if you’ve reached the point of receiving annoying phone calls or letters.
• Go through the process with the trustee: He or she will be assigned by the court. It will involve either liquidation in Chapter 7 or a payment plan in Chapter 13.
• Endure the 314 hearing: This is a meeting with creditors, but they usually won’t attend. The trustee will ask for some specific information for this meeting; it’s important to provide it fully and accurately.
• Take a debtor education class: A requirement. It helps understand how to make better decisions going forward.
• Discharge your debts: Pay creditors via liquidation or the payment plan. If it’s the payment plan, make sure payments are made in full and on time.

Bankruptcy will impact your credit score, and it will affect It for 7-10 years. A nonprofit credit counselor can help you take the steps that will lessen the impact of bankruptcy on your credit and credit score.

Tips to Avoid Debt as a Senior

Seniors should be wise about taking on more debt. Here’s a list of considerations to avoid debt as a senior:

• Down Sizing: Seniors simply do not have the same needs as they did when younger.
• Reverse mortgage: This allows those 62 and older to borrow money from a home you have paid off completely. The loan is repaid in full when you move, sell or die, though heirs can keep the home if they pay off the mortgage. While it may be appealing, many financial experts consider this option a last resort.
• Avoiding payment plans with high interest rates: Read the fine print. Never borrow more than you have to.
• Avoid credit cards with high interest-rate charges: Putting a lot of money on a credit card when you can’t pay it immediately is never a good idea.
• Avoid scams: If someone is calling with an offer that seems too good to be true, it probably is not worth considering. Deal with legitimate people you know and trust.

Bankruptcy Alternatives & Financial Planning

Generally, bankruptcy works best for seniors who do not own a home and do not have a lot of assets. In this case, these seniors do not have a lot of items a court can force him or her to sell.

For those who own a home and have a lot of equity in the home, alternatives to bankruptcy should be considered. Medical debt, for instance, often can be negotiated by calling the provider. If bankruptcy is not a good option, speak to a credit counselor about these other ways to address debt:

• Debt consolidation – This means consolidating all debt into one loan. Watch the interest rate; It won’t make sense to consolidate if you don’t get a lower rate.
• Debt settlement – You and the debtor come to an agreement to pay less than what is owed. Creditors typically demand a lump-sum payment. It could take 2-3 years to come up a big enough “lump sum.”

Financial planning can help avoid getting the point of considering bankruptcy. Options include:

• Credit counseling – It’s never too late to learn. A counselor can assess needs, debt and income and come up with a plan that works for the long- and the short-term.
• Debt management – A nonprofit credit counselor works with creditors to consolidate debts into one account, significantly reduce the interest on the debt and eliminate it in 3-5 years.
• Government assistance for seniors – Numerous programs are in place to help seniors. Understanding them is important. In addition, private agencies can also be available to help, including Meals on Wheels and AmeriCorps Seniors.

It is never a bad idea to seek help when needed.