Being elderly in America has more than its share of issues—affording proper healthcare, being forced to work much longer because of the need for health insurance or not having saved enough for retirement. Now, throw one more financial demon into the mix. More and more elders are being forced into bankruptcy.
In 1991, elder bankruptcies made up 2% of total filings. According to a report from Indiana Legal Studies, it is now up to 12% and growing. The study found that 78% of elders who file for debt relief made less than total median income.
Changes in the workplace are one reason behind what’s going on. Trade unions are not as strong as they used to be and therefore, have less power in contract negotiations. Real wages are stagnant. And the tradition of worker pensions has all but disappeared. Companies realized it was cheaper to put 401(k) plans in place and offer a matching contribution, placing most of the retirement savings burden on the employee.
Increasing medical costs are also a contributing factor. Many seniors rely on Medicare for their healthcare. Politicians seem content to talk about Medicare and just as content to do nothing about it. In the meantime, Medicare is paying less to medical providers. Elders are then forced to dig deeper into, what for many, is a limited pool of dollars, and with people living longer, often into their 90’s, healthcare costs eat more and more of a senior’s budget.
According to the Federal Reserve’s Survey of Consumer Finances, 60% of senior households had debt in 2016 and 29% of senior households owed money on mortgages or other housing debt. These rates represent approximately a 50% increase in the number of senior households holding debt over the last 25 years.
According to Nolo, an online legal information site, elders should ask whether filing for bankruptcy protection is really necessary or even if it’s a good idea. Here are two situations that make filing bankruptcy of questionable value for seniors:
You don’t have anything a creditor can take. Creditors aren’t allowed to take the things needed to maintain a home, such as household goods, a modest car, Social Security funds, and many retirement accounts. Because these things make up all of what many seniors own, many are “judgment proof,” and therefore, filing for bankruptcy isn’t necessary. Even so, some judgment-proof individuals will file to stop creditor calls and eliminate the worry of losing money from a bank account.
You have too many assets to benefit from bankruptcy. When you own property and income that isn’t protected from creditors, filing for bankruptcy might not be a good idea. Chances are you’d lose the property in Chapter 7. In Chapter 13, you’d have to make a high Chapter 13 repayment plan payment because you must pay for any property you’re not entitled to protect (but you can keep it).
Determining When Bankruptcy Makes Sense for a Senior
Even though bankruptcy isn’t always necessary, or even beneficial, it can work for some seniors. Here are few things to ask yourself:
- Do you have the type of debt that can be wiped out (discharged) in Chapter 7?
- Do you want to catch up on home or car arrearagesthrough a Chapter 13 repayment plan?
- Can you exempt (protect) all or most of your property?
- If you have to give up (or pay for) some property, will you discharge enough debt to make filing worthwhile?
- Is your income low enough to pass the Chapter 7 means testor will you be required to make monthly payments in Chapter 13?
Additional issues seniors will want to consider include:
Discharging medical debt and credit card bills. These are two of the easiest types of debt to discharge in bankruptcy. In fact, filing for Chapter 7 bankruptcy can wipe out qualifying debt in a few months. But remember, if you’re judgment proof, the creditor likely won’t be able to collect for these bills anyway.
Protecting home equity can be problematic. Many seniors have significant equity in a home. The homestead exemption protects a certain amount of equity, but the amount varies depending on the laws of the state. In Chapter 7, the trustee will take nonexempt property (including home equity) to pay creditors. (Find out more in the Homestead Exemption in Bankruptcy.)
Protecting retirement accounts. Under federal bankruptcy law, almost all tax-exempt retirement accounts, including 401(k)s, 403(b)s, profit-sharing, and defined-benefit plans, are exempt in bankruptcy. IRAs and Roth IRAs are also protected up to a particular amount. You’ll want to check with a bankruptcy attorney to be sure that your retirement qualifies for protection.
Protecting Social Security benefits. Your creditors can’t take your Social Security benefits outside of bankruptcy, and they’re exempt (you can keep them) in bankruptcy, but only if the funds remain in a separate account. Once commingled with other funds, they lose protection. Also, your Social Security benefits aren’t counted as income for qualification purposes when taking the bankruptcy means test. But your Social Security income must be disclosed in your bankruptcy budget, and might still be used to disqualify you if your budget shows a significant amount of disposable income each month.
Retirement funds aren’t protected once withdrawn. Receiving money from your retirement account can be tricky, too. In bankruptcy, your retirement withdrawals get treated as income for bankruptcy qualification purposes, and like cash for exemption purposes (most states don’t provide much of an exemption for cash). Because these funds lose any protected status once withdrawn, a creditor can use a bank levy to get them. (Also, if you comingle withdrawn retirement funds with Social Security funds in the same account, the Social Security funds will lose the protected status. Again, the best practice is to keep Social Security funds in a separate account.)