A Guide to Senior Citizens and Bankruptcy: When to Do it and When Not To
Seniors are prone to facing a lot of money issues, especially for those who do not have a large amount of retirement savings. There is an increasing number of seniors filing for bankruptcy throughout the United States. In fact, individuals 55 and older are filing for bankruptcy 12% more then they did 13 years ago. Depending on your situation, filing for bankruptcy can actually be the best option for financial relief. This article will explain which situations are best for bankruptcy and how you can actually benefit from a bankruptcy.
Before considering bankruptcy, it is important to consider any other alternatives you might be able to do to avoid filing for bankruptcy. Some other alternatives that can be considered include:
- renegotiate secured loans
- debt consolation
- deferment of debt
- professional debt negotiation
- interest debt reduction
People file for personal bankruptcy to eliminate their debts, and to get protection from creditors, which prevents creditors from wage garnishment and seizing personal assets. It is very important to note that creditors can not seize any pension assets. If you are a senior who has considered the above alternate steps to avoid bankruptcy, and still couldn’t help resolve debt issues, then it looks like bankruptcy should be used. If you are a senior with no or very low income, and with high amounts of debt due to various factors such as medical bills, then you should file for bankruptcy.
For seniors considering bankruptcy there are two main options to consider named Chapter 7 and Chapter 13 bankruptcy. Chapter 13 bankruptcy is always the first type of bankruptcy you should file for, if you can afford it. Also, before you go on, it is important to note that bankruptcy is an irreversible step. Once you start the process, you cannot change your mind and go back.
Types of Bankruptcy: What You Need to Know
Chapter 7 Bankruptcy
In Chapter 7 bankruptcy you begin by providing the court with a list of all your debts, along with a list of everything you own. With Chapter 7 bankruptcy, most or all of your debts are relieved, and you turn over non exempt assets to the bankruptcy trustee, who sells the property, and then uses the proceeds to pay the creditors. It is important to note that Chapter 7 is available to seniors who income is below the median income in their state. Also it is for those who pass a means test which shows that they do not have enough disposable income to fund a Chapter 13 repayment plan. A means test compares your average monthly income, against the state median to determine if you can file for Chapter 7 bankruptcy.
The main advantage for Chapter 7 bankruptcy is most of your debts will be gone, and you will not have to repay them.
It is important to note that not every single one one your debts will be relieved with Chapter 7 bankruptcy. Some of these debts include:
- debts not listed when you first listed your debts
- debts incurred through fraud
- alimony or child support payments
- consumer debts owed to a single creditor that are more then $1000 for luxury goods or services
- cash advances that are more then $1000, and are extensions of consumer credit
- many types of taxes
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is available to individuals who do not owe more then $250 000 in unsecured debt, or more then $750 000 in secured debt. Unsecured debt includes credit card debt, medical bills debt, as well as loans. Secured debt is debt that is secured with property which can include, a mortgage, car, boats etc. If you default on this debt, the lender can seize the property to recover what is owed.
With Chapter 13 bankruptcy, you are able to keep your assets and your property while you repay some of your debts through an extensive payment plan, that last either 3 or 5 years. If you are not eligible for Chapter 7, then you have to go with Chapter 13. You can choose Chapter 13 if you want to keep your assets as with Chapter 7 most of the assets are sold to the creditors.
With the repayment schedule for Chapter 13, you usually make one monthly payment to a trustee, who takes that money and distributes amongst the creditors. The payment schedules can be formulated to allow you to pay less on months you might make less money, and more on months when you make more money.
The main advantages of Chapter 13 bankruptcy is it allows you to keep your property, which you might have been able to afford to keep, and it protects you from the creditors.
Bankruptcy and Medical Bills
Many times, seniors are forced into bankruptcy because of their medical debts. Fortunately, it is one of the easiest debts to discharge in bankruptcy. Filing for Chapter 7 bankruptcy can diminish all of your medical bills within a few months. You should note that bankruptcy only eliminates debts that you have at the time of the actual bankruptcy. So if you are about to incur more medical bills and debt, wait a little longer to file for the bankruptcy, so you can include the medical bills.
It is a different story for seniors who filed for Chapter 13 bankruptcy. Since Chapter 13 involves repayment, the medical bills that were included in the repayment plan are still there. However, depending on the monthly income and the amounts between the secured and unsecured debts, a debtor could be required to pay a portion of the medical bills and even some other unsecured debt.
Retirement Accounts in Bankruptcy
These are the accounts seniors rely on to get them through the golden years. So fortunately, most retirement accounts are protected in bankruptcy.
Tax exempt retirement accounts are protected in Chapter 7 by federal law. This includes 401(k)s, 403(b)s, profit sharing plans, IRA’s, and defined benefit plans. There is one exception that is very important to know here. IRA’s and Roth IRA’s are protected up to $1 245 475.
Obviously with Chapter 13, all your retirement accounts are safe as well, since your not losing possession of anything. If a senior has a very large pension they might not be eligible for a Chapter 7 filing, and will have to file a Chapter 13 bankruptcy and set up a repayment plan.
Social Security Income With Bankruptcy
In Chapter 7, any income you make with social security is protected. Also, this income is not counted for purposes for the Chapter 7 means test. Basically, you are very likely to qualify for Chapter 7 if all or most of your income comes from social security.
There can be issues with knowing which funds are from social security income, as when a creditor obtains a judgement, they just garnish the bank account. The creditor will have no way of knowing if the social security income has been deposited into the bank account and exempted. In order to avoid this issue, all seniors should keep the money received from social security in a separate account. Also, they should let creditors know in writing that the account contains only money from social security.
With Chapter 13 bankruptcy, your social security income is included when they determine how much you have to pay each month for your repayment plan.
Income/Property Can Be Protected Without Bankruptcy
It is possible for your income to be protected without bankruptcy, which could possibly eliminate the need to file for bankruptcy. If you have low income, and mainly only receive social security, and have low assets, then your income and property could be protected even if you do not file for bankruptcy. This is because creditors who get judgements on you, legally cannot take any social security income, and can only take 25% of other wages. There are a few exceptions to this rule, as creditors can take social security income for tax debts, student loans, and child support.
If you do not own your own home or have expensive cars, then creditors don’t really have much that they can take from you, so as a result you might not really need to file for any sort of bankruptcy.
Life After Bankruptcy
Bankruptcy comes with a lot of changes in life, and for seniors it could lead them to resort to living in a retirement home.This is especially the case for seniors that filed Chapter 7 bankruptcy. Many seniors will worry if a retirement home could reject them because of their bankruptcy. Well rest assured, as the retirement home cannot reject you for this as this would be discrimination under legal federal law.
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However, for private retirement facilities, it could pose a problem. A private assisted living facility could deny a senior access because of their bankruptcy. Also since the senior is filing for bankruptcy, it means they have a lot of debt, so the high debt could also be the reason for denying the senior to live at the private home. However, some times the private home will ask the seniors family members for some sort of financial guarantee that the fees will be paid. When this happens, it is like the family member is co signing with the senior.