Debt Consolidation Options for Senior Citizens

The burden of debt weighs heavily on senior citizens. The U.S. Census Bureau says that 71% of retirees have debt not related to their mortgage and the average balance is $19,888.

That means nearly three quarters of senior citizens in the country are in debt.

This situation can be overwhelming, but there are debt-relief options available to relieve the burden. One is debt consolidation, which means combining multiple debts into one loan with fixed monthly payments at a lower interest rate.

We’ll take a look here at debt for seniors, and some options to help.

What Types of Debt Do Seniors Carry?

Seniors reported more than $53 billion in medical debt in 2020, most of it debt that built up over the years. The Consumer Finance Protection Bureau reports that one in five older adults have medical debt and income less than $25,000.

Other types of debt carried by seniors include credit card debt, mortgages, and student loans, Student loans appear because senior citizens can have unsecured student loans they took out to fund their child’s education or their own.

The stress associated with this debt is compounded by the fact that seniors typically are on fixed incomes financed by Social Security, a pension (if they’re lucky) and perhaps an IRA or 401k. As seniors age, they tend to need more medical care, which adds to the stress as they spend what they have paying off debt after retirement.

This kind of financial situation can be harmful to the mental and physical well-being of a senior citizen.

Debt Consolidation Options

Seniors can attack their financial situation with different options that provide relief. These options do not eliminate the debt, but they do make it more manageable.

Among the options we’ll go over are debt consolidation, a reverse mortgage, a home equity loan, and a balance transfer credit card. They will require good credit, and some courage.

However, the idea behind consolidation is to find a way to make one payment at a lower interest rate (hopefully) to one creditor, which in the end will provide senior debt relief.

Debt Consolidation Loan

Debt consolidation loans are personal loans that typically have lower interest rates than other unsecured loans.

This requires applying and qualifying for one loan that is used to pay off multiple debts. Then, instead of making several payments to different creditors, one monthly payment is made to one creditor.

It’s wise to shop these loans to find the best interest rate and most reliable lender. If successful, this approach can reduce the overall amount you spend on debt each month.

Reverse Mortgage

This type of loan works the opposite – or reverse – of your mortgage.

Instead of borrowing money up front and paying it back over time, seniors receive a monthly payment or a lump sum from a lender and they pay it back when the senior sells the home or passes away.

This option is good for some people but is definitely not for everyone.

To make it worthwhile, the senior should own the home outright or have a lot of equity in it.

Put another way, it’s an option who are home rich (because they own all or most of the home) and cash poor. Also, there are a lot of fees and costs associated with it, so research this thoroughly before going through with it.

Home Equity Loan

These loans allow a homeowner to borrow against the equity built up in the home.

If you bought the home for $200,000 and have $50,000 left to pay on your mortgage, you have $150,000 in equity. You can then typically borrow 80% of the equity (or in our example, $120,000).

A home equity loan typically has a fixed interest rate that is repaid in monthly payments at a lower interest rate than unsecured debt like credit cards.

The money borrowed can be used for any purpose.

Be aware: This loan will reduce the equity in your home, meaning when you sell the home the equity loan has to be repaid. It also includes closing costs. Finally be aware that if you can’t or don’t make the payments, you could lose the home.

Balance Transfer Credit Card

A balance transfer credit card allows a borrower to transfer debt from one or more credit cards to another card at a lower interest rate. Most balance transfer cards offer an initial 0% interest offer, which would reduce the monthly payment significantly.

However, be careful when evaluating this type of credit card offer. Many balance transfer cards require the balance to be repaid in the “introductory” period  – usually 12-18 months. If the balance is not paid off during that period, you must pay interest on whatever balance remains.

There is also a transfer fee (usually 3%-5%) on the original amount owed.

Alternatives to Debt Consolidation for Seniors

While debt consolidation for seniors may help many, other options are available. All should be carefully assessed.

Debt Settlement

Debt settlement means negotiating with creditors to pay less than what you owe.

A creditor may take this route because they feel it’s better to receive something than see someone default.

It sounds enticing if you have debt, but it has risks. Most debt settlement is done by a for-profit debt settlement company, and the process can take 2-3 years.  The balance owed can increase dramatically when fees for the service, interest and late payment charges are added. Debt settlement also stays on your credit report for seven years, which will make it harder to borrow in the future.

Bankruptcy

Those in seriously dire straits may choose bankruptcy, but it should be a last resort.

It is best to speak with a bankruptcy attorney before filing because bankruptcy involves complex rules and laws.

There are two major types of bankruptcy, Chapter 7, and Chapter 13.

Chapter 7 is the most popular, and entails selling assets to repay debt. Your home, car, pension, and Social Security are typically exempt from sale.

In Chapter 13 bankruptcy, debtors propose a repayment plan to eliminate debts over a 3-5 year time frame. Chapter 13 is called “wage earners bankruptcy” because you will need a regular income to make the monthly payments.

Credit Counseling and Debt Management Programs

A great way to gain insight into your financial situation and attack debt is to speak with a nonprofit credit counselor.

These counselors will assess your situation over the phone and are obligated by law to provide the best solution possible for your situation.

One plan they could offer is debt management, which reduces credit card interest rates and lowers monthly payments to an affordable level.

Credit counseling should ease the stress of debt, and should lead to the best debt consolidation option for your situation.