Senior Citizens & Bankruptcy

Bankruptcy is not always a good option for senior citizens who are having financial difficulties.

Older Americans filing for bankruptcy are not unusual when inflation and health care costs are rising. Furthermore, even though seniors have some benefits over other debtors, filing for bankruptcy is not the best option for people who stand to lose a lot of property. Learn more about other typical problems that senior citizens face when filing for bankruptcy by reading on.

One simple method to eliminate debt and increase the amount of money available to pay monthly bills is to file for bankruptcy. Still, a lot of seniors don’t feel comfortable declaring bankruptcy, and it’s not always a good idea or even necessary.

For seniors, filing for bankruptcy is questionable in the following two scenarios:

There is nothing that a creditor can seize from you. The items required to keep a house, like furniture, a small car, Social Security money, and numerous retirement accounts, cannot be taken by creditors. Since these items comprise the entirety of what many seniors own, many of them are “judgment proof,” meaning that declaring bankruptcy is not required. Nevertheless, some impervious to judgment will file to block creditor calls and get rid of the anxiety associated with losing money from a bank account. (See Also: What Is a Levy on a Bank Account?)
You are too wealthy to gain anything from filing for bankruptcy. In situations where your assets and earnings aren’t shielded from creditors, declaring bankruptcy might not be the best course of action. It’s likely that you would forfeit the property in Chapter 7. Because you have to pay for any property that you are not entitled to protect (but can keep), you would have to make a large Chapter 13 repayment plan payment in Chapter 13.

Discover the benefits and drawbacks of declaring bankruptcy for your financial situation.

Choosing the Right Time for a Senior to File for Bankruptcy
Bankruptcy isn’t always required or even advantageous, but for some seniors, it can be effective. Consider the following questions for yourself:

Do you have the kind of debt that Chapter 7 allows you to discharge?
Would you like a Chapter 13 repayment plan to help you catch up on unpaid mortgage or auto loans?
Can you protect all or most of your property with an exemption?
Will you be able to pay off enough debt to justify filing if you have to give up (or pay for) some property?
Will you have to pay on a monthly basis under Chapter 13 or is your income low enough to pass the Chapter 7 means test?
Other matters that seniors should contemplate are as follows:

Paying off credit card debt and medical debt. These are the two categories of debt that are most easily discharged in bankruptcy. Actually, qualifying debt can be eliminated in a matter of months by filing for Chapter 7 bankruptcy. But keep in mind that the creditor probably won’t be able to collect these bills anyway if you’re judgment proof.

Keeping your home’s equity safe can be difficult. Significant equity is held by many seniors in their homes. A certain amount of equity is protected by the homestead exemption, though the exact amount varies based on state laws. In order to settle debts with creditors, the trustee in Chapter 7 will seize nonexempt property, including home equity. (See the Homestead Exemption in Bankruptcy for further information.)

Safeguarding retirement funds. Nearly all tax-exempt retirement accounts, such as profit-sharing, 403(b)s, defined-benefit plans, and 401(k)s, are exempt in bankruptcy under federal bankruptcy law. To a certain extent, IRAs and Roth IRAs are also protected. You should consult a bankruptcy lawyer to confirm whether bankruptcy protection is available for your retirement. (See Your Retirement Plan in Bankruptcy for more information, including the current IRA limits.)

Safeguarding Social Security income. Your Social Security benefits are exempt (you can keep them) in bankruptcy, but only if the money stays in a different account. Your creditors cannot seize your benefits outside of bankruptcy. They become unprotected once they are mixed in with other money. Also, when completing the bankruptcy means test, your Social Security benefits are not taken into account as income for qualifying purposes. However, your Social Security income needs to be included in your bankruptcy budget and could still be used against you if your budget indicates that you have a sizable monthly disposable income. See Is Social Security Income Included in the Chapter 7 Means Test for additional information.

After they are taken out, retirement funds are not secured. Getting paid from your retirement account can also be difficult. When you file for bankruptcy, your retirement withdrawals are considered income for qualifying purposes and like cash for exemption purposes (most states don’t offer a significant cash exemption). A creditor may obtain these funds through a bank levy since, once withdrawn, they are no longer protected. Additionally, Social Security funds lose their protected status if they are combined with withdrawn retirement funds in the same account. Once more, keeping Social Security money in a different account is the best course of action.)