Filing for Bankruptcy as a Senior Citizen

When it comes to senior citizens, bankruptcy protection is the same, but different, as bankruptcy protection for Millennials. Or any other generation, for that matter.

It is the same in the sense that filing for bankruptcy as a senior is a decision that should be made carefully after considering all other options. If you are retired and in debt, there are steps to take before reaching bankruptcy protection as your solution.

But bankruptcy for seniors comes with certain unique factors that should be taken into consideration before deciding.

Inflation and medical costs have a bigger impact on seniors on fixed incomes and with more complicated health care issues. At the same time, seniors may have more equity in their homes to protect in any financial process.

Put simply, one of the realities of senior bankruptcies is that it takes time to go through the process and get to a place where you are debt-free. And time is something that seniors don’t have to waste. That doesn’t rule out bankruptcy as an option, but it does add an extra factor that should be part of any decision.

At the end of the process, you may still find bankruptcy protection is your best option for getting debt relief, but do your research.

What Is Bankruptcy?

Bankruptcy is a court-approved plan to reorganize your finances so that your unsecured debts are discharged, and you can move forward without that burden. It is not a Get Out of Debt Free Card. You have responsibilities as determined by the court.

It is a way to pause your finances, identify solutions, and follow through with a plan to settle outstanding debt.

Before deciding on bankruptcy as a strategy, you must choose which kind of bankruptcy protection is right for you:

• Chapter 7 bankruptcy is the most straightforward form of bankruptcy protection. To qualify, your income must be below the median income for the state where you live. This is called passing a “means test.” Many seniors with fixed or limited incomes pass the “means test” and will qualify for Chapter 7 bankruptcy. When you file under Chapter 7, your unsecured debts (credit cards, medical debts, utility bills) are wiped out. In exchange for a clean slate, many of your so-called “non-essential” assets will be liquidated, with the money being split among your creditors. There are exemptions, including your home, a car, and other items required for a normal life. The downside of Chapter 7 is that it remains on your credit report for 10 years and can affect your ability to secure loans in the future.
• Chapter 13 bankruptcy is called the “wage earner’s bankruptcy” because a petitioner must have a regular income to qualify for a Chapter 13 debt repayment plan. Basically, Chapter 13 bankruptcy is like a consolidation loan. You make monthly payments through a court-appointed trustee for 3-5 years. That means your creditors cannot contact you directly, which eliminates unwanted collection calls. In a Chapter 13 bankruptcy, you keep your property, but must stay up to date on the monthly payments to the court and your other obligations, such as your mortgage. Seniors must consider the 5-year duration of the process, compared to 4 to 6 months for Chapter 7. A Chapter 13 bankruptcy will remain on your credit report for 7 years.
• Chapter 11 bankruptcy is primarily for businesses or partnerships. It can be the right strategy for individuals who own all or part of a business that is struggling with debt. Chapter 11 is often called “reorganization” bankruptcy. You offer a plan to reorganize your business that includes paying off creditors. The creditors vote on whether to accept the plan. This is a rare form of bankruptcy – only 1% of all bankruptcy filings are Chapter 11 – and almost never applies to seniors.

When Should a Senior Citizen File for Bankruptcy?

Bankruptcy protection can be especially helpful to seniors in certain situations. The primary reason: Time. There is no telling how much of it you have left to solve your problem.

• Anyone can amass medical debt, but it is a cruel reality that medical debts are likely to affect us more as we age and are less able to handle them. When your debts are mounting and your income is reduced, then bankruptcy becomes a viable solution. Fortunately, medical debt is one of the easiest kinds of debt to erase through bankruptcy protection. It is the kind of unsecured debt that Chapter 7, especially, was designed to address.
• Another of those unsecured debts is credit card debt. Credit card debt for seniors can be especially harmful. They have had a lifetime to accumulate debt and the results of enormously high interest rates. Like medical debt, credit card debt can be addressed through Chapter 7 proceedings. It may require the sale of nonessential assets, but within six months, you could be free of credit card debt. A Chapter 7 bankruptcy remains on your credit report for 10 years, but seniors may consider that worth the risk in order to eliminate high monthly payments. It is hard to increase your income during your golden years, so decreasing your monthly expenses may be the solution.

Why Should a Senior Citizen Not File for Bankruptcy?

Bankruptcy is not the magic wand it may sound like. There are negative impacts and consequences that anyone, including a senior, may prefer to avoid. Being aware of these is crucial to making the right decision for your unique circumstances.

• It is important to protect equity in your home, especially if that amount is over the exemption limit to qualify for Chapter 7 bankruptcy. You don’t want to risk having any of your hard-earned equity subject to liquidation.
• Most retirement income is protected during bankruptcy proceedings, but not all. Be very clear whether you are risking any of your retirement savings. Federal laws protect Social Security, pensions, disability benefits and Veterans Administration benefits. IRAs and Roth IRAs are protected up to a certain amount. It is important to note that retirement funds are not exempt once they are withdrawn. At that point, the funds must be counted as income. That may not prevent you from choosing bankruptcy, but it may influence your timing. It is better to file while retirement funds are still protected.
• Social Security, including disability, payments are protected by federal law. These are the most common retirement benefits for most people, so their protection is important to understand. Learn more with a Social Security calculator.
• When negotiating or settling debts with unsecured creditors, such as credit card companies, don’t decide on bankruptcy solely to protect personal property. This is why: Unsecured creditors are not likely to go after your possessions anyway, so bankruptcy protections aren’t necessary. Laws protect certain property, such as your home and car. Other personal property doesn’t have much value to a creditor, who would have to claim the property, assess it, then find someone to pay fair market prices for it. It makes more sense to creditors to work out a payment plan, even if that means forgiving some of your debt.

Filing for bankruptcy will have a negative impact on your credit score. A Chapter 7 bankruptcy remains on your credit report for 10 years. Chapter 13 stays on your credit report during the period you are making monthly payments, usually 3-5 years. Understanding your credit score is important, but there are particular strategies for improving your credit score after bankruptcy. The damage to your credit score depends on your actual score at the time you file. A good credit score of 780 or higher can lose more than 200 points. A score of 680 will drop by 150 to 180 points. Either way that’s a significant hit that affects your ability to get credit or affordable interest rates.

This sounds harsh, but it follows the logic of lenders perfectly. If you had to be forgiven a large amount of debt, that sends signals to lenders that doing business with you may cost more than it’s worth.

Other Forms of Debt Relief for Seniors

It is clear that bankruptcy should be the option of last resort, including for seniors, but what are the better alternatives to bankruptcy?  There are several answers, each with its own advantages and limitations. Some are available to anyone and some are special financial resources for seniors.

Consider these debt relief option before committing to bankruptcy protection:

• Credit counseling is an excellent place to start, for two reasons. The process, when conducted with the help of a nonprofit credit counseling agency certified by the National Foundation for Credit Counseling (NFCC), is free to you. Second, a process conducted by a certified credit counselor will give you a range of options, including budgeting and debt management strategies. Counselors are trained to assess an individual’s personal situation and find the best options to address that situation. Federal law requires nonprofit credit counselors to offer the best debt-relief options or their companies could lose their nonprofit status.
•  A debt management plan could be created with the help of a nonprofit credit counselor. It means committing to regular monthly payments to your creditors, and to closing credit card accounts. In exchange, your interest rates are reduced and monthly payments are lowered to fit your budget. Such a program generally takes 3-5 years to complete, but benefits such as an improved credit score can be seen much earlier.
• A debt consolidation loan is a tool to transfer debts owed to multiple creditors to a single debt owed to one place. You take out a low-interest bank loan large enough to pay off high-interest credit cards. A debt consolidation loan can eventually improve your credit score, provided you make on-time payments to the lender. Of course, qualifying for a loan will depend on your current credit score. The lower your score, the less likely it is that a bank, credit union or online lender will approve a debt consolidation loan.
• Debt settlement is a different strategy in several ways. The attractive part of this is that you could end up paying less than what you owe on the debt. However, debt settlement calls for you to stop making payments to your credit card companies. Instead, you make deposits to an escrow account, while a debt settlement company negotiates with creditors to settle your debts for less than what you owe. The process can take 2-3 years, and your credit score will be heavily damaged during that period because of nonpayment. Your balance also will grow because of late fees and interest applied to your account. Debt settlement remains on your credit report for seven years.
• Credit card debt forgiveness is similar in name to debt settlement, but there are major differences in how it works. For openers, there is no negotiating. Creditors agree up front to reduce the amount owed by 40%-50%. In exchange, the consumer agrees to fixed payments for 36 months. No interest is charged during that time. However, missing a payment could void the agreement. Nonprofit debt settlement is only offered by a few nonprofit credit counseling agencies, including InCharge Debt Solutions.

Talk to a Professional about Reaching Your Financial Goals

A nonprofit credit counseling agency can help with a number of solutions for your debt problems. Bankruptcy is one of those solutions, but a nonproft credit counseling agency is legally required to provide the best advice for your particular situation. Sometimes the best step is to start by talking with a professional credit counselor, such as those waiting at InCharge Debt Solutions.

Several debt solutions can leave a dent in your credit score, which is key to moving forward in good standing. Improving your credit score after bankruptcy is an important follow-up step that can lead to a brighter financial future.