Seniors Filing Bankruptcy: Regaining Financial Control?

by Sidney Wike, Wike Law Firm 

The number of seniors who petition for bankruptcy protection from their creditors has increased steadily in recent years. A combination of mounting debt and dwindling resources has forced many seniors to use loans and credit cards to pay for prescriptions, medical co-pays, and basic necessities. The financial stress they are under can become overwhelming. While a young person has the opportunity to rebuild themselves financially, many seniors do not. For them, the relief provided by the bankruptcy law can be dramatic.

The financial decline of seniors often goes unnoticed, even by their loved ones. In an effort to satisfy creditors, many will forego medication, cancel insurance policies and invade retirement accounts. Unfortunately, embarrassment leads many to postpone filing bankruptcy because they think that everyone will find out. Although bankruptcy is a matter of public record and is reflected on the credit report, chances are the only people who will know about the bankruptcy are the creditors and others with whom you have shared information.

The two types of bankruptcy available for most individuals are Chapter 7 and Chapter 13. Under both chapters 7 and 13, the judge immediately issues a restraining order that halts all collection activities, including lawsuits, phone calls, collection letters, wage garnishments, repossessions and foreclosures. Most people who file under Chapter 7 are able to keep their cars and keep their homes so long as they can continue to make the payments. In the typical case, the judge signs an order that wipes-out credit card debts, medical debts, personal loans, payday loans and debts to finance companies. In many cases, old tax debts are also discharged under chapter 7. Debts not discharged through Chapter 7 include child support, alimony, student loans and recent tax debts.

Chapter 13 is a repayment plan in which the person filing makes a monthly payment to a bankruptcy trustee who distributes the money back to the creditors. It is available to someone who earns too much money Chapter 7 and also for homeowners who want to keep their home but are facing foreclosure.

Filing bankruptcy, however, is not for everyone. Just because someone is in financial distress and unable to pay their bills does not necessarily mean they should file for bankruptcy. A creditor has little leverage over a person who has little income and owns no real estate. Creditors cannot have you arrested and taken to jail for not paying a debt, nor can creditors garnish social security checks. Most seniors living in assisted-living communities would fall under this category and the financial benefit of bankruptcy may be marginal for such individuals.

Many older Americans who have lived through the great depression have shunned credit cards in the past but have had to rely on them during the past several years and never expected to carry mortgages into their senior years. The stress of having to bear that burden can be agonizing and can even have adverse health effects. Many such individuals find that putting one’s financial affairs in order; starting with a bankruptcy filing, is cost-effective and an immediately obtainable form of asserting control over one’s life.

Many savvy estate planners view bankruptcy as a valuable estate planning tool. Eliminating debt and wiping out judgment liens through bankruptcy ensures that the assets will pass to children without interference from creditors. Fortunately, most retirement accounts such as IRAs and 401(k)s are protected in bankruptcy.

Social security saw no cost-of-living adjustment for 2016 and the increase going into 2017 will be less than one third of 1%. This means that the average paycheck will increase by about five dollars for 2017. The cost-of-living adjustment for Social Security has been less than 2% per year since 2012.

In sum, while fixed incomes that fail to keep pace with inflation has been driving up the number of seniors who file bankruptcy, it is not for everyone. Those with few assets that can stomach the phone calls and collection efforts may see little benefit in filing. On the other hand, the bankruptcy can still be a worthwhile experience if it brings peace of mind and restores a feeling of control over one’s life.