Filing for bankruptcy protection is a big decision for anyone, but for older people, it also raises some unique concerns. Many older adults have a lot of equity in their homes, something worth protecting, but that could be threatened in certain Chapter 7 bankruptcies.
If you’re an older adult, it’s important to consider all your options and know what’s at risk before filing for bankruptcy.
Is bankruptcy possible?
“When someone comes to me asking about bankruptcy, I would ask ‘What’s driving you? What’s the pressure point? What are your vulnerabilities and what are your goals?” says bankruptcy attorney Robert Haupt.
This is especially important to ask for seniors, because their situations are usually different than younger adults. If they own their homes, they likely have a lot more equity in their home. Which means they could have more to lose in the case of a Chapter 7 bankruptcy if their equity isn’t protected.
One scenario that would make the value of filing for bankruptcy protection questionable for seniors is if there’s simply nothing for a creditor to take. If you’re retired and don’t have much income, this might apply to you. It could mean you are “judgment-proof.” Creditors generally can’t access assets like your Social Security benefits, retirement accounts or things you need to maintain a home like household goods.
“Retirement funds are protected, Social Security benefits are exempt — they can’t get them,” says Haupt. “Virtually anything IRS recognizes as tax exempt is going to be exempt to a certain level.”
There are a few exceptions. If you’re withdrawing your retirement funds, that may be a problem: they are treated as income in the context of bankruptcy qualifications and lose protection once withdrawn. If your retirement funds are in the same account as retirement funds that were withdrawn, the Social Security funds will lose that protection, too, Haupt says. “You do need to segregate these Social Security funds,” says Haupt.
If it ends up there’s nothing for creditors to take, then bankruptcy doesn’t really make sense. “Creditors want their money, If you can convince them there’s nothing to get — most of the time they’re not punitive,” Haupt says.
The reverse situation is true, too. If you have too many assets, you might not benefit from bankruptcy. If you own assets that aren’t protected from creditors, the chances are very high you would lose them in a Chapter 7 bankruptcy. You would probably be able to keep your home with a Chapter 13 bankruptcy repayment plan, but a Chapter 13 bankruptcy is also a longer, harder process.
The biggest issue with a Chapter 7 bankruptcy is likely to be protecting your home equity. Homestead exemptions — which determine how much home equity you can keep in a Chapter 7 bankruptcy — vary by state.
“States like Missouri or Illinois are not consumer friendly states to file bankruptcy in,” Haupt says. The benefits of filing for bankruptcy in one of these states can be greatly diminished, he says.
When should older adults consider bankruptcy?
So in what scenario might it be a good idea for an older adult to file for bankruptcy?
“I always say ‘You don’t file bankruptcy when you want to, you file when you have to,’” Haupt says. “I always discourage it until it’s absolutely necessary.”
That threshold will depend on a lot of factors. But as a general rule of thumb, if the debt is strongly impacting your quality of life, bankruptcy might be a solution.
“Some people have a really low tolerance of stress,” Haupt says. “If they’re losing sleep, it might be time to file.”
It’s also worth looking at the kind of debt you’re looking to discharge. Medical debt and credit card debt are two of the most common reasons to file for bankruptcy, and they are some of the easiest debts to discharge. Sometimes Chapter 7 bankruptcy can help wipe these debts out in a matter of months, Haupt says. Debt collectors also by law have to stop calling once you’ve filed for bankruptcy, which could bring you more peace of mind.
What are some alternatives to bankruptcy?
If you’ve determined that bankruptcy isn’t right for you, you have other options for dealing with your debt. Haupt dislikes debt consolidation because it still involves borrowing money.
“Settlement and negotiation can be good options,” says Haupt. “Creditors know they’re not suing a large bank — they’re only going to collect so much, and they prefer as little fuss as possible. If you act with integrity and have a good negotiation, you can get by without filing for bankruptcy.”
If you’re an older adult considering bankruptcy, figure out your financial goals, take stock of all your assets, and talk to a reputable professional to answer your questions.
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