More Retirees Are Filing for Bankruptcy
More Retirees Are Filing for Bankruptcy
More and more retirees are filing for bankruptcy due to several reasons. Disappearing benefits, rising medical costs, planning inadequately, increasing caretaker expenses, and declining income are a few of the major causes. More seniors are not only filing for bankruptcy, but they also are representing a larger percentage of filers. In 1991, only 2% of bankruptcy filers were 65 years or older. Now, more than 12% of bankruptcy filers are seniors, up 10% in less than thirty years.
To work this hard your entire life to get to the point where you must file bankruptcy can be devastating. However, filing bankruptcy for many people gives them the fresh start to regroup – to stop digging their hole of debt even deeper and stand on solid financial ground again.
Some people emotionally beat themselves up when they realize they need to file bankruptcy. It is a very personal decision. However, bankruptcy law was created because as old as time, people have realized at times people need a fresh financial restart. Having a society so encumbered by debt that they can never dig themselves out from underneath all the money they owe only benefits the corporations that helped place them there.
Many factors are contributing to the increasing rate of seniors needing to file bankruptcy. It is not just one factor, but many factors compounded. Parents are helping their children more now, co-signing student loans and taking out second mortgages or other loans themselves to help their children pay education expenses. Accountants are more frequently seeing seniors with student loan bills; whereas, twenty to thirty years ago, this was not common. Many times, parents take out these extra loans with the expectations that their children will make the payments. However, if the children fall on tough times and are unable to make the payments, it can make it very difficult for someone on a fixed income to take over responsibility for the extra payment.
Also, with older age comes more medical expenses, and these expenses continue to rise. For some of the poorest seniors, when unexpected medical expenses arise, they only have Medicare to rely on. Yet, Medicare benefits continue to have large gaps in coverage, and premiums continue to increase. This means that the nation’s poorest seniors end up paying a much higher percentage of their fixed income on medical expenses. The Kaiser Family Foundation reported that the amount spent on medical expenses by seniors on Medicare in 2016 was as high as 16% of their total household spending. This reflects a much greater percentage (around 10% more) than families not on Medicare reported spending on medical expenses. The Foundation expects this percentage to continue to increase, as there is no end to the rising medical expenses in the foreseeable future.
Some families also face unexpected care taking expenses: a spouse becomes disabled or experiences severe health issues sooner than expected; an aging parent did not plan for their own caretaking expenses and, now, must rely on their own aging children to provide much needed resources; or a child unexpectedly becomes disabled, divorced, or impoverished and must return home to live with their parents. Any of these can cause a huge financial strain. Add to this that many benefits, including pensions and health insurance, from companies and unions, are vanishing. Plus, people are living longer yet receiving social security benefits later. Calculating for all these factors, it is no wonder that the number of seniors filing for bankruptcy in the past three decades has tripled.
Factors to Consider in Determining if Filing Bankruptcy Is the Right Move
If you are a retiree considering filing for bankruptcy, consider the following factors to help you determine if filing bankruptcy is the right move for you. The following factors are red flags that you should consider filing for bankruptcy:
- Considering taking money out of your retirement plan or loans against your retirement funds to pay off unsecured debt, such as: medical expenses or credit card debt;
- Paying off outstanding unsecured debt, such as medical expenses and credit card debt, will take you longer than five years;
- Experiencing drastic changes in your income, such as retiring and moving to a fixed income, and the new amount will not support your debt repayments;
- Undergoing other major financial changes, such as: unexpected caretaking expenses for a spouse, parent, or child; or
- Facing foreclosure on your home or wage garnishment.
Although if you are experiencing one or even several of these factors, it does not necessarily mean you should file bankruptcy. However, you should consider it, as an option. If you are experiencing any of these red flags or other types of financial hardship, it is important that you speak with a bankruptcy professional immediately. They can review your individual circumstances, and they will be able to advise you of your options and best possible outcomes.
Retirement funds are protected in bankruptcy, because they are exempted assets. Retirement funds are earmarked for retirement, not debt repayment. If you are using retirement funds to pay off debt that is dischargeable as part of the bankruptcy process, it probably is better to file bankruptcy. Unsecured debt, such as credit card and medical expenses, can be discharged, allowing you to protect your retirement income and use it for its intended purpose: your retirement.
Unsecured Credit Debt.
If it will take you more than five years to pay off outstanding debt, including interest, you should seriously consider filing for bankruptcy. Interest rates on unsecured credit card debt can be as high as 36%, with the average rate for all users being around 17% in 2018. What is even worse, is there is no limit on credit card interest rates mandated by law. So, if you make payments late or need to skip a payment, you may see your credit card interest rate increase, further compounding the problem. In 2010, a credit card defended its 79.9% interest rate. If you have a 30% credit card interest rate and carry $25,000 in debt, this means you are paying ($25,000 x 0.30) $7,500 in interest every year or $625 monthly.
Under the circumstances above, to pay off the debt, you would have to be able to pay a lot more than $7,500 a year to make a significant impact in the underlying debt. Otherwise, you are just paying interest and not paying any towards the principal amount owed. If you are unable to make the full payment for interest and pay an additional amount towards the principal amount owed, you will never be able to get out of debt; even if, you end up paying back more than the original amount owed in interest. There are many debt horror stories out there, where consumers have paid back two or three times the amount of the original amount owed in interest, and some still owe the original amount or more.
Credit card companies make billions on interest and fees and make it very difficult to get out of debt. Filing bankruptcy allows for the discharge of unsecured credit card debt. Chapter 7 Bankruptcy allows for all of the credit card debt to be discharged, which means you do not have to repay any of it back. Chapter 13 Bankruptcy allows you to pay pennies on the dollar. Both forms of bankruptcy lead to a financial restart that will give you the opportunity to get out of the hole debt leaves.
Drastic Income Change.
For retirees or people facing unemployment or a disability, switching to a fixed income can be a drastic change and take time to get accustomed to the differences. If your fixed income is not enough to carry your unsecured debt load, it can be a red flag that filing bankruptcy may be your best option.
Declining income is another factor that affects the need for people to file bankruptcy. Seniors are continuing to work, but often they receive less pay than what they received previously at their main jobs. When unexpected things happen to younger people, they have more options available to them, such as: picking up another job, asking family for help, or taking out a loan. For some seniors, these options just do not exist. If a senior is already working one job, it can be a nearly impossible expectation for them to pick up a second job to pay for unforeseen expenses.
Unexpected Caretaking Expenses.
You could have done everything right. You saved for your retirement. You saved extra for rising medical costs. You planned wisely. Then the unexpected happened. Maybe an aging parent did not plan well for their costs and now must rely on you for ongoing caretaking expenses. Perhaps, a child, unexpectedly, becomes disabled. Maybe you or your spouse need to retire earlier than expected to care for the parent or child. Or, you need to go into debt to pay for the unexpected caretaking expenses.
If unexpected situations arise that cause financial hardship, you may need to consider filing bankruptcy to protect your retirement income, home, and other assets and offload unsecured debt. You definitely should not use retirement funds unless you understand completely the effects on your overall financial health and have reviewed carefully all your options.
Home Foreclosure or Wage Garnishment.
Other red flags that you should consider filing for bankruptcy include if your home is being foreclosed on or if your wages are being garnished. Depending on your individual circumstances, bankruptcy may help protect your wages and stop the foreclosure process.
Using retirement income to pay off unsecured debt, like credit cards or medical expenses; needing more than five years to pay off outstanding debt; experiencing drastic changes in your income; undergoing other major financial changes, such as unexpected caretaking expenses for a loved one; or facing foreclosure on your home or wage garnishment can be red flags that filing bankruptcy is the right move for you to obtain a financial restart.
The Bottom Line
More and more of the financial burden has been shifted from employers and the government in the past couple of decades to individuals. Retirees not only need to have planned more for their retirement in forms of 401k and IRA contributions, but now they are responsible for a greater share of their expenses, especially healthcare.
If you are facing a challenging time financially, it is important you consider all of your options, including filing for bankruptcy. A bankruptcy expert can evaluate the details of your situation and review with you the pros and cons of filing bankruptcy. Postponing filing bankruptcy can cost you thousands. Make sure to consult a bankruptcy expert for the best time to file and ways to protect your assets.