Filing for Bankruptcy in Retirement -- A Good Thing?
by Cindy Perman
Monday, December 20, 2010
The number of people filing for bankruptcy protection in retirement has soared in recent years — even before the recession.
In fact, people 65 and older are the fastest-growing segment of the population seeking bankruptcy protection, according to a recent study from the University of Michigan Law School.
The problem is simple math, said Johanna Sweaney Salt, a CPA with Kaufman, Schmid, Gray & Salt in Claremont, Calif. Their medical expenses, taxes and other costs keep going up, while their income is going down. Social Security hasn't had a cost-of-living adjustment in a long time and pensions and retirement accounts took a huge hit during the recession. Reverse mortgages and other alternatives presented to them as "solutions" often just dig them further in the hole.
"Most people think 'Oh, I have Medicare — I'm covered,'" said Jean Setzfand, director of financial security at the AARP. "But in fact, there are quite a lot of out-of-pocket expenses — and those continue to rise." The biggest one, she said, is long-term care costs. Plus, a lot more people are going into retirement carrying a mortgage.
"If your medical expenses haven't gone down and your only source of income goes down by $200, $300, $400 or $500 a month — the well runs dry," Salt said. "Your alternatives are to get into debt or borrow from relatives — and many seniors are proud and don't want their families to know the kind of mess they're in," she said.
The result is that they start living off of their credit cards and suffering the harassment of creditors and debt collectors. Elder Americans carry 50 percent more credit-card debt than their younger counterparts, the Michigan survey showed.
For many, bankruptcy carries a stigma of personal failure and shame. But sometimes, Salt said, it's their only option — and not necessarily a bad one.
"A tremendous burden is lifted from their shoulders and it isn't as awful as many expect," she said.
Not only will it alleviate nagging thoughts about debt that can ruin what are supposed to be your "Golden Years" but filing a bankruptcy case can "stop the constant drain on their limited income that is going to creditors," said Theodore Connolly, a bankruptcy lawyer and co-author of the book "Road Out of Debt: Bankruptcy and Other Solutions to Your Financial Problems."
"Every dollar they don't pay to creditors is one more dollar they can use for their everyday expenses," he said.
Of course, the big question most seniors have when it comes to bankruptcy is: Will they take all of my retirement savings and leave me penniless?
"No," Connolly said. "Social security and retirement accounts (up to approximately $1.1 million) are exempt from creditors so seniors will continue to have that stream of income."
What's more, many states have "homestead exemption" laws, which protect home equity from creditors. In Massachusetts, for example, you're protected up to $500,000.
Credit-card debt and medical bills are classified as "unsecured debt" and would be discharged in the event of a bankruptcy filing, which means seniors would likely not have to pay them — or pay only a percentage of them, Connolly explained.
"As a result, a senior has the ability to preserve some of the estate that he or she may want to pass on to descendants without interference from creditors," he said.
For example, if you live in Massachusetts, owe $200,000 in medical and credit-card debt and have a home worth $500,000, if you filed for bankruptcy protection, the $200,000 would be discharged and the full $500,000 your home is worth could be passed on to your children.
"The senior comes away with a fresh start, keeping Social Security checks and retirement income without seeing a big percentage going to creditors and can enjoy his or her remaining years," Connolly said.
Now, let's take that Massachusetts example and say you just decided to suffer quietly and ride that $200,000 debt out until you die. Not only will your Golden Years be spent getting harassed by creditors but now, creditors can collect that $200,000 out of the value of your home and your kids would only get $300,000.
Even if you don't have kids, Salt says, do you really want to wake up every morning worrying about money? If you get out from under the burden of debt now — your Golden Years have a real shot at being just that — golden.
And, while some may be worried about a bankruptcy filing negatively impacting their credit score, Connolly says that shouldn't be a concern for seniors. A credit score is most important when making a big purchase like a car or home — things most seniors won't be buying in the future.
There's also this myth that filing for bankruptcy protection is heart-wrenching and one of the most traumatic things you can experience in life.
Not true, Connolly said.
"Actually, most debtors who file don't actually appear before a judge. Ninety-percent of cases filed never see a bankruptcy court," he said. Nearly all of your interaction is with your lawyer. You have to appear at one meeting with a trustee — but that's four to six months after you're been discharged from bankruptcy protection, he said.
"People shouldn't be fearful of filing for bankruptcy protection," he said.
Despite the rising number of seniors filing for bankruptcy, there are many more who have severe debt problems. Connolly estimates that for every senior who files for bankruptcy protection, there are two or three more who should be filing.
So, how do you know when you should file for bankruptcy?
"If you're at a point where you can't handle your bills anymore and every day is a chore to get up," Connolly said.
It's not uncommon for seniors with financial problems to live off of credit cards for a year or more, Connolly said. But if you're living off of your credit cards for even six months — that's when you need to raise a red flag and seriously consider filing for bankruptcy protection.
"The myth of bankruptcy is that you have to give up all your property and live under a bridge," Connolly said. "That's not fact. Most people don't lose anything."
"It can be a positive thing for seniors — and I'm not just saying that because I'm a bankruptcy lawyer," he said. "It's facing up to your problems... and a fresh start," he said.
Not only will you get to keep your house and keep your retirement savings, but you'll also be able to get a credit card. It's actually not hard at all to get a credit card — even after you've filed for bankruptcy protection.
So, you get all the conveniences of modern living — without the burden and guilt of carrying a lot of debt.
Though, presumably, this time around, you'll be a lot smarter, keep your bills in check and when you need help — ask for it.
"Have a spending plan," Salt says. "I don't like to use the word budget — like I don't like to use the word diet. I have an eating plan."
She suggests that, like dieting, you take a week to write down every little expense — to see where your money's going and where you might cut back. And for the children of retirees, she suggests checking in with your parents to see how they're doing financially.
"It's a matter of just having a couple of initial conversations with simple questions," Setzfand said. Find out if their income from Social Security, pension, retirement account, etc. is meeting their basic living needs, if they're carrying a deficit and if so, how they're making up for that shortfall.
Maybe you start with, "Boy, this economy has affected a lot of people. How are you doing — are you OK?" Salt suggests. You want to get them help if they need it — before it's too late.
"Being debt-free is the new rich!" she quipped.
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