You’ve worked all your life. You’ve earned for your family. You’ve raised your children. You did everything you were responsible for. Sometimes, even by sacrificing your own wishes, your happiness. And after all these tough years, you deserve a happy, stress-free retirement. Don’t you?
But what if financial instability ruins your retirement ? What if an unexpected medical condition arises, and the consequent medical bills lead you to the doorsteps of bankruptcy?
In recent years, America has witnessed an increasing number of bankruptcy filers over the age of 65. Nowadays, seniors are getting into trouble with debt more often compared to the past and heading to the bankruptcy courts for help. In 2007, seniors above 65 represented 7% of the bankruptcy filers in the US, where the figure was only 2% just a decade ago.
While the numbers continue to grow, according to a 2010 report by John Pottow, professor of University of Michigan Law School, revealed that seniors are the fastest growing demographic of bankruptcy filers. However, bankruptcy – whether it’s a Chapter 7 asset liquidation or Chapter 13 repayment plan – poses some serious issues for seniors.
Any retiree should consider these five questions before knocking the door of the bankruptcy court.
1) Will the Social Security funds remain protected ?
It doesn’t matter whether it’s the case of a senior filing or not, Federal law protects your Social Security funds from being garnished. Even if you choose not to file, you should still remain vigilant to protect your Social Security money.
As per law, if a creditor obtains a judgment against you, it’s only your bank account that’ll get garnished.This means that your Social Security money will be garnished too if those get deposited in your savings account and the creditor will be in no position to determine if the money came from Social Security and is exempted as per law.
So that it doesn’t end up in a mess, seniors should keep their Social Security income in a separate account and inform the creditors about it in writing. In addition, a new rule that became effective in May 2011 prohibits financial institutions from handing over money to creditors.
2) Are retirement funds safe ?
Just like Social Security aids, most retirement accounts like 401(k)s and pensions are exempted as per federal bankruptcy law. This means under any circumstances creditors won’t be able to put their hands on these assets.
Seniors enjoying hefty pensions may not be able to qualify for Chapter 7. Rather, they may be forced to file under Chapter 13 repayment plan. Such a process is always controversial since while some seniors may have too much income to qualify for Chapter 7, the sum may not be enough to pay for the debts and take care the necessary expenses for a living.
In bankruptcy, seniors having IRAs are treated otherwise. IRAs up to $1,095,000 are exempt as per federal law. However, if you are filing in your state, you can use your state’s statute and increase the exemption. Luckily, exemptions in most states are large enough to cover most of your retirement accounts.
3) Is the house at stake ?
Though the home equity of a debtor is exempt from creditors in bankruptcy, the amount of exemption varies from state to state. For instance, in Florida, there is no limit to the homestead exemption. Seniors filing in the state of Florida can protect their equity and keep their home even in Chapter 7 bankruptcy, which liquidates all your non-exempt assets to pay your creditors.
Based on your state, if your home equity is much greater than the homestead exemption amount, it’d be unwise to file for Chapter 7. In that case, you should proceed for Chapter 13 bankruptcy, which will ask you to keep paying your mortgage (although possibly at a much lower rate).
4) Will medical bills get eradicated ?
As we said earlier, high medical bills are the prime cause behind high bankruptcy filings among seniors. However, since medical bills are mostly classified as unsecured debt, they are completely discharged in a Chapter 7 bankruptcy. Unfortunately, seniors who are not eligible to file under liquidation bankruptcy will have to file for Chapter 13, and here the bills won’t go away.
In a rare case, your outstanding medical bills could be considered as secured debt. If the medical provider has managed to obtain a judgment against you, the debt would be considered as secured debt and the provider would have a judicial lien against all your tangible property.
5) Will retirement homes reject you ?
Though nursing homes who accept Medicaid may ask for your financial statements, they can’t reject your stay or application based on the fact that you filed bankruptcy. The federal law strongly prohibits such discrimination. However, things can take shape differently in private or assisted living facilities.
Though private facilities don’t entertain seniors who filed bankruptcy, many allow on the basis of a financial guarantee from a family member of the senior that all the dues will be paid. Such an arrangement is nothing but co-signing a loan.
Prevention is always better than cure – especially if it’s avoiding debt after retirement. However, if you have made the mistake and see no way out than to file for bankruptcy, having a detail discussion with a bankruptcy attorney would be a good idea.
Andy Masaki is an editor with Oak View Law Group and contributes specifically on personal finance topics. You can also find him fielding queries based on money management topics at various online communities and social media platforms. You may find his writing in Comparecards, Realmoneyanswers, Familyshare , Believeinabudget.