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Debt Relief for Seniors: Financial Aid Options

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In a Nutshell

Being in debt as a senior citizen is a bigger issue than being in debt at a younger age. Whether you are saving for retirement or have already retired and are trying to make ends meet on a fixed income, time is of the essence when it comes to resolving debt at this age. This article will explore bankruptcy as a potential solution for helping senior citizens eliminate debt, as well as other debt-relief, debt management, and financial assistance options.

Written by Attorney John Coble.  
Updated July 26, 2021


In 1992, a little over half of American families headed by someone 55 or older had debt. In 2016, this number increased to two-thirds of families. This is a matter of concern. Our economic system is designed for people to save money so that they can retire by age 65. Debt repayment can be a serious obstacle to reaching the retirement savings necessary to achieve this goal.

With older adults, time is of the essence when it comes to eliminating debt. If you're not yet retired and paying debts is interfering with your retirement plan, it’s important to take action. Eliminating debt is even more important if you're a retiree. If you're living on a limited income, making debt payments can make it more difficult to pay your regular living expenses. 

You may want professional help to determine your best strategy for dealing with debts as a senior citizen. A nonprofit credit counseling agency is a good place to start. If you have very little time before retirement, consider having a free consultation with a bankruptcy attorney. Filing bankruptcy is the quickest route to debt elimination, but there are consequences to consider. 

This article will explore bankruptcy as a potential solution for helping senior citizens eliminate debt. Then it will discuss other debt-relief, debt management, and financial assistance options.

Debt Relief Options For Senior Citizens

Being in debt as a senior citizen is a bigger issue than being in debt at a younger age. If you're not yet retired, but you need to be saving for retirement, high debt payments make this more difficult. If you’re a retiree with debt payments, it may be difficult to make ends meet, or worse, you may be borrowing money to make payments. 

If you were younger, it would be best to consider other debt options before bankruptcy because you’d have more time to pay your debts down before you retired. As a senior citizen, time is of the essence because there is less time until retirement. The most important rule to follow is this one: Do not take money from your retirement account to pay a debt unless you have explored all other options first.

Bankruptcy

Chapter 7 bankruptcy is a four to six-month process to eliminate most of your unsecured debts. Unsecured debts are loans not secured by collateral like a home or car. Examples of unsecured debts include credit card debts, personal loans, and medical debts.

In a Chapter 7 bankruptcy, everything you own is part of the bankruptcy estate. Though it almost never happens, the bankruptcy trustee can take the assets you own and sell them to raise money to pay off the unsecured debts. For the trustee to be interested in an asset, it has to have enough nonexempt equity. It's rare for a person filing a Chapter 7 bankruptcy to have enough nonexempt equity to lose assets. That means, for most people, the only thing they lose in a Chapter 7 bankruptcy is a lot of debt.

Nonexempt Equity

It's important to understand what nonexempt equity is. The first question is whether there is any equity in the asset. Say the asset in question is your house. If the house is worth $200,000 and you owe $80,000 you have $120,000 of equity in your house. But, do you have any nonexempt equity?

Every state has a list of different exemptions for different types of property. Though bankruptcy law is federal law, bankruptcy courts look to state law to determine property rights (such as exemptions). There are exemptions for cars, clothes, household furniture, life insurance policies, homes, and much more. Each state made its exemption list from scratch. The only commonality among the states is they all have a homestead exemption.

For the example above, the state’s exemptions will determine whether this is too much equity. If you live in Alabama each homeowner will only have a $16,450 homestead exemption. If you're married and jointly own the home, you have a $32,900 exemption. Note that Alabama has a base $15,500 exemption that's indexed for inflation every three years. On April 1, 2021, it jumped to its current level.

Consider a hypothetical using the example above. We’re operating with the assumption that you own your home with your spouse. If Alabama exemptions are applied, you have $87,100 of nonexempt equity in your home. If you file Chapter 7 bankruptcy, in this case, you'll probably lose your home. But, if you're using the adjacent state of Florida's exemptions, you might have an unlimited homestead exemption. This means you would keep your home if you file a Chapter 7 bankruptcy. This illustrates how different these rules are in different states.

So, which state's bankruptcy exemptions do you use? Federal law requires you to use the exemptions for the state where you live unless you moved to that state within 730 days of filing. In that case, you'll use the state where you lived before. If you lived in Alabama but moved to Florida and bought a home so you could keep it in a Chapter 7 bankruptcy, you would need to wait two years to be able to use Florida's exemptions. 

Florida has other hurdles to its unlimited homestead exemption. If you're planning a move to Florida to take advantage of its homestead exemption, it's a good idea to talk to a Florida attorney first.

Types Of Debts In Bankruptcy

A Chapter 7 bankruptcy will eliminate most types of unsecured debts, but what about debts that are secured by collateral? These secured debts aren't eliminated in a Chapter 7 bankruptcy unless you change these debts to unsecured debts. A good example would be your car loan. Your car is the collateral for your secured car loan. If you file Chapter 7 and you want to keep the car, you usually reaffirm the loan. This means you keep your car contract and keep making payments on it, just as if you had never filed bankruptcy.

You have the ability to change your car loan into an unsecured loan. You do this by surrendering your car to the loan company. You no longer have the car and the debt for that car is eliminated just as if it had been credit card debt. not all unsecured debts can be eliminated in Chapter 7 bankruptcy. Some unsecured debts are nondischargeable debts. These debts include child support debts, some taxes (but not all), and student loans. If you have these types of debt, a Chapter 7 bankruptcy might not be your best choice.

Chapter 7 Bankruptcies For Senior Citizens

For many senior citizens, a Chapter 7 bankruptcy isn't the best choice. This is because many senior citizens have significant equity in their homes from paying on the home for decades. Unless they live in states with a generous homestead exemption (like Florida), they could risk losing their home.

Chapter 13 Bankruptcies

It's always best to consider Chapter 7 bankruptcy before considering Chapter 13 bankruptcy. You only want to use a Chapter 13 bankruptcy if it's the best choice to meet your goals. The following are some examples of when you might want to use a Chapter 13 bankruptcy instead of a Chapter 7 bankruptcy.

  • You have too much nonexempt equity in property you don't want to lose.

  • You have debts you need to eliminate that are nondischargeable but can be handled in a Chapter 13.

  • You've fallen behind on secured debts where you want to keep the collateral.

  • You're earning too much money to file a Chapter 7 bankruptcy.

In a Chapter 13 bankruptcy, the bankruptcy trustee doesn't sell things to pay the unsecured creditors. The trustee gets the money to pay unsecured creditors out of your future income. While it's rare for a trustee to sell assets in a Chapter 7 bankruptcy, the trustee in a Chapter 13 bankruptcy is always going to get money out of your future income. A Chapter 13 bankruptcy includes a 36-60 month payment plan in the bankruptcy court.

In a Chapter 13 bankruptcy, the unsecured creditors have to get at least as much money as they would have in a Chapter 7 bankruptcy. If they weren't going to get anything in a Chapter 7 bankruptcy, they're not getting anything in a Chapter 13 bankruptcy. Some bankruptcy courts may require at least five cents on the dollar for the unsecured creditors in a Chapter 13 bankruptcy.

If you've owned your car for more than 910 days (2.5 years), you can pay the value of the car instead of the loan balance. This is often a lot of money. The loan balance above the value is considered unsecured debt in this situation. In Chapter 13, short-term secured debts like car loans can also have their interest rates reduced to 1%-2% above the prime rate. This also reduces the expense by a great deal.

Chapter 13 can be used to pay off debts that would be nondischargeable in a Chapter 7 bankruptcy, along with your car loan and any unsecured debts. Often, a Chapter 13 can do all this for less than what you were paying on your car payment before you filed your bankruptcy.

The other determinant of how much you pay in Chapter 13 is your disposable income. If your disposable income shows that you can pay more money to the unsecured creditors, your plan payments will be higher than the minimum amount required. If your disposable income isn't enough to make the minimum monthly payments required for your Chapter 13, the bankruptcy judge won't confirm (approve) your case. When a case isn't confirmed, it's dismissed.

Credit Card Debt Counseling

Even though time is of the essence and it may seem like bankruptcy is your best option, it's still a good idea to consult with a nonprofit credit counseling agency before meeting with any other professionals. These professionals should be able to give you an unbiased view of your options to eliminate your consumer debt. It's important to remind your counselor that you’re trying to resolve your debt in a limited timeframe. 

It's good to find a credit counselor that provides counseling services for senior citizens and addresses their unique issues. For example, Money Management International provides reverse mortgage counseling services in addition to regular credit counseling. ConsumerCredit.com provides resources for retirement planning on its website. Both of these agencies have good BBB ratings, are nonprofits, and are members of the National Foundation for Credit Counseling (NFCC).

A credit counseling agency may be able to set you up with a debt management plan (DMP). These agencies usually handle basic counseling for free. But they may charge a fee for the work involved in administering a DMP. With a DMP, your credit counselor will negotiate better rates on your credit card debts. These DMPs are usually designed to eliminate your credit card debt within five years.

A DMP may be the best choice for you if…

  • You have a low amount of debt and it's mostly credit card debt, 

  • You have sufficient money in your retirement account, and/or 

  • A Chapter 7 bankruptcy will not work for you. 

A DMP won't hurt your credit as much as bankruptcy, but it's likely that you won’t have as many credit needs during retirement. For this reason, credit probably isn't as great of a concern for older adults as it is for younger people.

Debt Consolidation

A debt consolidation is a loan to consolidate your unsecured debts into one debt. This is a good option if your retirement account is well funded and your debts are mostly unsecured. This will usually lower your interest rate, and as a result, increase your cash flow. This means you'll have more to contribute to your retirement account or for living expenses if you’re already retired. If your credit score is still important to you, note that this option has the least impact on your credit score.

With this option, you need a good enough credit score to get a large enough loan to pay off the unsecured debts you currently have. Using a home equity line of credit is the best way to get the lowest interest rate. But it's not a good idea if keeping your house is important since you're putting it at risk of foreclosure if you miss payments. In the future, you'll have less income to make the payments.

Keeping your house may not be important to you. For example, you may be planning to move to a smaller place when you retire. Seniors often have more options than younger adults. It’s important to consider the many options available to you. Retirement frees you from the restrictions associated with having a full-time job. You don't have to raise children. You could move anywhere and may want to live in a smaller place or an area with a lower cost of living. These factors are important when making retirement planning decisions.

Debt Settlement

Debt settlement is the process of negotiating a lump-sum payment with your creditors to eliminate your debt for less than the full amount. This will hurt your credit and might have tax consequences. That being said, does credit matter to you? Are you planning to take out a new mortgage as a senior citizen? Which is more important: Your cash flow or your credit report? You’ll need to carefully consider these questions after receiving counsel from experts.

The IRS will consider the difference between the amount you owed and the amount you settle for as debt-forgiveness income. Since it’s considered income, you’ll probably have to pay taxes on it. The question is, do you care about the tax consequences? You might not have taxable income. If your income is only from Social Security, it’s tax-free. Or, maybe most of your income is from municipal bonds so the tax consequences don’t matter as much to you. Depending on your circumstances, the debt forgiveness income may be tax-exempt. Maybe you’re insolvent. It's important to realize that if you use bankruptcy as your debt solution, this income won’t be subject to taxes.

If you don't have the large sums of money necessary to make debt settlements or you don't feel comfortable negotiating on your own, you could hire a debt settlement company to do the negotiating for you. These companies usually want you to pay into an escrow account for up to three years to build up enough money to make an acceptable debt settlement offer. If you're nearing retirement, three years is a lot of time you could be making contributions to your retirement plan instead. 

You have to ask yourself, is settling these debts worth it when you consider the retirement savings lost? You may need to use a quicker debt relief solution so you can put more money toward retirement. Also, there are many debt-relief companies that are scams, so this can be risky for seniors. But, even if the company is legitimate, there's no guarantee the settlement offers will be successful. You could get into a much worse mess than you were in. 

Government Aid Options For Senior Citizens

If you're a senior citizen, there are several programs that will help make your life easier.

There are several agencies that can help you with legal assistance. The U.S. Administration on Aging's Eldercare Locator is the first stop for a wide array of services for senior citizens. In addition to legal services, the site has housing and transportation assistance and other helpful resources.

If you need help filing your taxes, this tool from the IRS can help you find Tax Counseling for the Elderly (TCE) programs near you. During tax season, AARP can help you find tax assistance for seniors.

Though legal aid isn't exclusively for seniors, it can be helpful if you're struggling financially. Upsolve has a tool to find legal aid in your state.

Medicare

Medicare is complicated. A complete discussion of Medicare requires its own article. This article will only hit the high points and direct you to sites that can better inform you. Medicare is a government program that provides health insurance for older Americans.

The four parts of Medicare are as follows:

  • Medicare Part A provides inpatient/hospital coverage.

  • Medicare Part B is for outpatient health care.

  • Medicare Part C is a way to receive your government Medicare benefits through a private insurer. These programs are sometimes called Medicare Advantage programs. Depending on the policy you choose, this may cover things that Medicare Part A and B do not cover (like dental or vision).

  • Medicare Part D is your prescription drug coverage.

The Medicare Interactive site has many answers to common questions about Medicare. Medicare.gov is another good resource for information.

Housing For Seniors

This tool, provided by the U.S. Department of Housing and Urban Development (HUD), is the first place you’ll want to look for housing programs for seniors. HUD’s housing counselors can advise you about all the housing programs available to you. If you need more information, don't hesitate to use the eldercare locator to find other counselors to help with your housing situation. The primary government housing program for seniors is the Section 202 Supportive Housing for the Elderly Program. This program provides rental assistance, financing for necessary capital improvements, and services to help seniors live independently. These services include cleaning, cooking, transportation, and more.

Food Help For Senior Citizens

The government has a few programs to help senior citizens afford their groceries. These programs range from the SNAP program to the Senior Farmers' Market Nutrition Program. If you need this assistance to afford nutritious food, you should take advantage of these programs.

Tips To Mitigate Debt Load For Senior Citizens

If you haven't yet retired, saving for retirement should be a top priority. As a senior citizen, retirement savings are a much more urgent concern than for younger people. If you're already retired, it’s important to create a budget to make sure you can afford your expenses. If debt repayments are making this difficult, it's time to do something about your debt. 

There are many ways to ease the pain of debt repayments. But simple budgeting is often not enough. Credit counseling is always the best place to start. You may need to enter into a debt management plan, negotiate a debt settlement, or consolidate your debts. A reverse mortgage may also be a good idea. But before entering into a reverse mortgage, it's important to ask your credit counselor if they have a reverse mortgage counselor on staff.

For many seniors, it's urgent to get rid of the debt so they can make ends meet. In these cases, bankruptcy might be the best option.

Credit isn't as important if you're retired. You have Medicare for your medical bills. You probably aren't going to need a new mortgage. If you do buy a new house, it's often downsizing after the sale of your home. In these cases, the proceeds from the sale of the first home often pays for the purchase of the new home.

Still, credit is important. You may need to purchase a new car or have expensive car repairs. Your credit will be checked if you try to rent an apartment. Or, you may have a sick pet with a high veterinary bill that requires borrowing money. To keep good credit, use these time-honored methods: Pay your bills on time. Use credit only when necessary, and don’t make frivolous purchases on credit.

If you're a senior citizen and you're having a difficult time with debt, it's imperative that you consult with a debtor's attorney. You may be surprised at what they can do to eliminate debt. This one simple step may be the difference between happy golden years and a miserable retirement.

If you consider your options and determine that bankruptcy is your best option, check out this free tool from Upsolve. It's available if you have a simple, straightforward Chapter 7 bankruptcy. If you can handle your own bankruptcy, you can save the money you would otherwise have paid to an attorney.



Written By:

Attorney John Coble

LinkedIn

John Coble has practiced as both a CPA and an Attorney. John's legal specialties were tax law and bankruptcy law. Before starting his own firm, John worked for law offices, accounting firms, and one of America's largest banks. John handled almost 1,500 bankruptcy cases in the eig... read more about Attorney John Coble

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