Senior-citizen bankruptcies are on the rise, driven by socioeconomic factors such as insufficient Social Security payments, higher health-care costs, and increased individual responsibility for retirement savings.
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Between 2013 and 2016, 1 in 8 bankruptcy filers in the U.S. was age 65 or older; during the same time period, 21% were age 55 to 64, according to Robert Lawless, law professor at the University of Illinois’ College of Law who has co-authored research on the subject. There’s been an overall trend toward older filers since the study was first conducted in 1991, he says.
While some of the stigma of declaring bankruptcy has dissipated, there can still be negative consequences such as losing property and long-lasting effects on credit. Before declaring bankruptcy, make sure you weigh your options and avoid these potentially costly mistakes:
1. Not sufficiently exploring self-help options
Seniors who have debt issues may be able to negotiate directly with creditors or debt collectors. They may also be able to seek free or low-cost credit counseling and debt-management services through a nonprofit agency associated with the National Foundation for Credit Counseling.
Retirees may also seek to be put on payment plans for certain bills such as utilities, says Wendy Cappelletto, a supervising attorney with the Office of Public Guardian of Cook County, who also serves on the board of the National Academy of Elder Law Attorneys.
And for retirees having trouble paying their mortgage, 18 states and the District of Columbia offer a program called the Hardest Hit Program, which provides assistance to struggling homeowners through modification, mortgage-payment assistance, and transition-assistance programs.
The National Consumer Law Center also offers free self-help information for consumers on dealing with debt, bankruptcy, and debt-collection issues.
One area of caution: debt-settlement or debt-relief companies that may be able to arrange settlements of your debts with creditors or debt collectors for a fee. Aside from the free or low-cost counseling one can get through the National Foundation for Credit Counseling, it’s important for seniors to avoid any company that charges up-front fees in return for the promise of settling their debts. The Consumer Financial Protection Bureau also advises seniors to be wary of debt-settlement companies that advise them to stop making payments to their creditors.
2. Haphazardly liquidating assets
When seniors need money to pay their bills, it can be tempting to try selling certain assets to raise cash. Oftentimes, a 401(k) or an individual retirement account is low-hanging fruit, since these accounts may contain significant funds.
Before using these savings to pay off debt, seniors younger than 59½ need to consider factors such as whether there will be early-withdrawal penalties. Seniors of all ages need to think about whether the money will be enough to satisfy all their debts.
This analysis is especially important since generally 401(k) funds, and in many cases IRAs, can’t be taken in bankruptcy and used to pay creditors, says John Bollinger, vice president and partner in charge of the Hampton, Va., office of the Boleman Law Firm. Meanwhile, once you’ve liquidated these assets, they’re gone forever.
The same can be true with liquid assets such as jointly owned real estate or life insurance, which may also be protected from creditors during bankruptcy, depending on the circumstances and the state. “If you sell these assets, it’s too late,” Bollinger says.
3. Taking on additional debt to pay the bills
Some seniors take cash advances, pile on additional credit-card debt, or seek out high-fee, short-term loans that can have harsh consequences and can be difficult, especially for people in precarious financial positions, to pay back.
This can lead to bigger problems, including additional damage to your credit and undermining your ability to get out of debt, says John C. Colwell, a bankruptcy attorney in San Diego, who also serves as president of the National Association of Consumer Bankruptcy Attorneys.
When you’re having financial troubles, it’s also the wrong time to provide others with financial support. “There is a natural tendency to try and help an adult child or others, but you have to ask yourself if you’re financially secure enough to handle this,” says Lawless, the law professor. His research shows that 20% of seniors age 65 and above who have filed for bankruptcy cite trying to help someone else financially as a contributing factor.
4. Not seeking legal help
If you’re feeling in over your head, it’s advisable to consult an attorney. The Eldercare Locator connects older Americans and their caregivers with trustworthy local support resources, including legal help, based on their location. Seniors can also use the Legal Services Corp. website to locate nonprofit legal aid organizations in their state that may be able to help them navigate debt and bankruptcy-related issues.
The website of the National Association of Consumer Bankruptcy Attorneys is another resource seniors can use to locate an attorney in their area. For seniors who don’t qualify for legal aid, but are concerned about fees, there are a number of firms that will do pro bono work and sometimes firms will offer reasonable and discounted payment plans.
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