The rate at which seniors file for bankruptcy has more than tripled since 1991 amid reductions in retirement and benefit payments. Of the people that are filing for bankruptcy each year, 12.2% are aged 65-74 versus 2.1% for the same age group in 1991.
Adding to financial burdens, the age at which full benefits are paid by Social Security has risen from 65 (those born in 1937 or earlier) to 67 (those born in 1960 or later).
Medical debt is the leading cause for bankruptcy filings nationwide, accounting for roughly 62% of all bankruptcies, as a growing number of medical procedures are not covered by insurance or Medicare.
Should bankruptcy become unquestionable, then assets need to be taken into careful consideration. Chapter 7 bankruptcy allows one to discharge most if not all debts and turn over nonexempt assets to the court. Determining whether or not Chapter 7 is an option is based on income. Chapter 13 bankruptcy allows one to keep assets, such as a home, and repay debt via a court approved payment schedule.
The most significant asset for many seniors happens to be their home, which in many circumstances, have large amounts of accumulated equity. Whether or not that equity is vulnerable to creditors in a bankruptcy filing is contingent on the state of residence. Some states have a homestead exemption provision, which excludes a home and home equity from creditor access. Homestead exemption rules vary from state to state and should be reviewed carefully before making any final decisions.
Since many seniors have large amounts of equity accumulated over the years, the biggest risk is losing accumulated equity or a home to creditors.
Social Security income can be a factor when filing for bankruptcy. With a Charter 7 bankruptcy, income received from Social Security is not counted and is protected from creditors. A Chapter 13 bankruptcy does include Social Security income when calculating what the arranged debt payments are.
Bankruptcy amongst seniors used to be a rare thing. This is a trend, however, that is rapidly changing.
Kent G. Forsey, CFP®
Sources: American Bankruptcy Institute, National Council On Aging, OneBlueWindow, LLC