Bankruptcy for Senior Citizens

According to researcher Deborah Thorne of the University of Idaho, as of 2018, older Americans are not only increasingly more likely to file bankruptcy but they represent a larger portion of bankruptcy filers in general. Due largely to increased healthcare costs, reduced income, and reductions to their overall social safety net, more and more older Americans are unable to pay their bills as they become due during what should otherwise be their golden years.This article will discuss whether bankruptcy may be the right answer for you if you are a senior. And if so, what type of bankruptcy is best for you. And if not, what other alternatives are there to deal with debts you can no longer afford to pay.

Consider Whether Bankruptcy Is The Right Answer For You

It can be very difficult for elderly Americans who have worked their entire life to have to face the possibility of needing to file bankruptcy. Even if you have been very responsible with your money when you are on a fixed income, even one unexpected large expense can be a financial disaster. Whether it is excess medical bills not covered by Medicare, an accident, or long term COVID-19 related illness; bankruptcy may be your only means of keeping a bad financial situation from getting worse. Similarly, if you are retired, or nearing retirement age, and simply have more bills than you can afford to pay every month, bankruptcy can provide the debt relief you need.

But bankruptcy is not necessarily the best option for every senior who is retired or facing retirement. Even though retirement income like social security is typically exempt from garnishment to repay debts, other assets may not be. For seniors who have paid off their home, have significant cash on hand or own valuable assets, filing bankruptcy may put those assets at risk of being sold to pay creditors.

In addition to the many articles and resources offered by Upsolve to individuals considering filing bankruptcy, the best way to determine if filing bankruptcy is right for you as an older American is to consult with a competent bankruptcy attorney in your area. This attorney will be able to review your current financial situation, discuss your retirement plans and explain your state’s bankruptcy laws and how they will affect your social security, Medicare, and other retirement accounts if you file bankruptcy. They will also be able to tell you what type of bankruptcy is best for you.

Signs That You Might Be A Good Fit For Bankruptcy

Whether or not you choose to consult with an attorney, there are some things you can look at yourself to determine if bankruptcy might be a good fit for you. These include your source of income, i.e. social security, pension, part-time employment. Your real estate and personal property and the nature of your debts, i.e. credit card bills, personal loans, or mortgages. Start by looking at what assets you have that might have to be sold to pay creditors if you were to file bankruptcy. Typically, if you don’t own your home, and don’t have any significant assets or cash on hand, you don’t have to fear losing your personal property in a bankruptcy. This is because most states provide sufficient exemptions or allow federal exemptions to protect you from having to sell any of your property to pay debtors in a Chapter 7 bankruptcy.

In addition to looking at what type of property and assets you own, you should also look at what type of income you rely on every month. Because most seniors, who have retired rely primarily on social security income, VA benefits, pension, and federal employee retirement income, they are considered “judgment proof.” 

Judgment proof means their income can’t be garnished by creditors. In fact, in some instances simply knowing that you are judgment proof may relieve the anxiety of being pursued by your creditors and make filing bankruptcy unnecessary.

On the other hand, just because you collect social security and may be judgment proof does not mean creditors you aren’t paying cannot sue you in court or place your debts in collection. So, bankruptcy may still be a good option even if you are judgment proof. Because bankruptcy discharges your unpaid debts and legally prohibits your creditors or anyone else from attempting to collect them from you.

Signs That Bankruptcy Might Not Be The Best Answer For You

Bankruptcy laws are intended to provide relief to individuals who can no longer afford to pay their bills. As a result, bankruptcy laws limit the amount of property and assets individuals can keep when they file bankruptcy. These limits are known as exemptions because the property you can keep is exempt from being sold to pay your creditors. Any property that is not exempt, or the excess value of any property that exceeds the exemption can be sold to pay back some or all of your creditors. 

Most IRA accounts, including 401(k) accounts are almost always exempt regardless of how much money is in those accounts. However, once the money is removed from those accounts, it loses that exemption. As a result, if you own an expensive home or have lots of cash in the bank then even if you are on social security, bankruptcy may not be a good fit for you.

For most Americans, the single most valuable piece of property they want to protect in bankruptcy is their home. While almost every state, as well as the federal government, provides some form of exemption for the equity in your home, the amount provided varies drastically from state to state. Known as the homestead exemption, this exemption allows you to keep your home when you file bankruptcy as long as the equity in your home does not exceed the amount allowed under your state’s homestead exemption. For couples filing jointly the amount is sometimes doubled. Still, many seniors filing bankruptcy will have a hard time exempting all of the equity in their home since most seniors are likely to have paid off all or most of their mortgage, and the home is likely to have significantly increased in value since they first purchased it.

Another thing to consider as an older American when filing bankruptcy is what type of debts you want to get rid of through bankruptcy. Typically if your debts consist primarily of credit card debt, medical bills, collections, charge-offs, utility bills, personal loans, car loans, and cash advances, bankruptcy can provide you with meaningful debt relief. On the other hand, if your debts consist of unpaid child support, alimony, home equity loans, mortgages, unpaid taxes, or timeshares then bankruptcy will usually not offer you much relief.

Decide Which Type Of Bankruptcy Is Right For You

Assuming bankruptcy is right for you as a senior, you still need to determine what type of bankruptcy is right for you. There are two principal types of bankruptcy available to American consumers in the United States, Chapter 7 bankruptcy and Chapter 13 bankruptcy. Chapter 7 bankruptcy is known as a liquidation because instead of making payments to your creditors, your non-exempt property is liquidated to pay some or all of your creditors. And in exchange for liquidating your non-exempt assets, all of your dischargeable debts are discharged. Chapter 13 bankruptcy is known as a reorganization because instead of being required to liquidate any of your property, you restructure your debts and make payments for 3 - 5 years before receiving a discharge.

Consider Alternatives To Bankruptcy

Fortunately, even if bankruptcy is not a good solution for you, there are alternatives to bankruptcy that can provide you with a measure of debt relief and put an end to creditors chasing you for unpaid bills.

Two of the most popular alternative forms of debt relief instead of bankruptcy are debt consolidation and debt settlement. Debt consolidation can be accomplished either through a new loan, or through a debt management plan, or DMP. DMPs are usually facilitated through a licensed credit counseling agency that negotiates with your creditors to consolidate your credit card debt into one monthly payment. In addition to giving you the convenience of a single monthly payment, the credit counseling agency may also be able to negotiate a lower interest rate on your debt and get over-the-limit and late fees waived.

Debt settlement on the other hand typically involves negotiating with each of your individual creditors to accept significantly less than they are owed on your debts in exchange for one lump sum payment. Especially if you have retirement funds that are not exempt, this may be a way to eliminate one or more large, troublesome debts quickly.

Conclusion

Filing any bankruptcy can be a complicated process but filing bankruptcy as a senior citizen can be especially challenging. Even if you are interested in filing bankruptcy on your own, it is probably a good idea to talk to a competent bankruptcy attorney before doing so in order to get your “fresh start” off to the right start. If you can’t afford an attorney, Upsolve may be able to help!