By Francis Taylor, Asst. Editor
Sen. Elizabeth Warren has warned of the impact of medical expenditures on family finances and advocated expanding Social Security. Whether America is facing a “retirement crisis” in which seniors are making do with shrinking financial resources has been widely debated. But here’s a telling metric: Seniors are making a larger share of bankruptcy filings.
That’s the finding of a new paper by academic researchers affiliated with the Consumer Bankruptcy Project, which periodically samples personal bankruptcy filings from all 50 states and the District of Columbia. “Older Americans are increasingly likely to file consumer bankruptcy,” they write, “and their representation among those in bankruptcy has never been higher.”
The figures should worry advocates for seniors, because in terms of the overall financial health of the 65+ cohort, it’s likely to be the tip of the iceberg. “Only a small fraction of those who are having financial troubles file for bankruptcy,” one of the authors, Robert Lawless of the University of Illinois law school, told me. “So this is part of a much bigger story about financial distress among the elderly.”
Lawless and his colleagues point out that while bankruptcy is a last resort for any debtor and nothing like the panacea it’s often depicted to be, it’s an especially dire choice for seniors. Unlike younger debtors, seniors don’t have years ahead of them to rebuild their household finances while their debts are held in abeyance. “By the time they file bankruptcy,” the paper observes, “their wealth has vanished.”
America has some serious policy choices to make, and pretending that seniors are living the high life on Social Security doesn’t clarify matters, especially as the claim is typically made by conservatives as a rationale to cut Social Security and Medicare benefits.
The figures on bankruptcy suggest that the opposite is necessary — expanding Social Security and increasing benefits to shore up retiree resources against the decline of personal savings and pension income. The guaranteed retirement accounts advocated by a number of retirement experts — personal accounts funded by workers and employers during their working years, supported by a tax credit and a government guarantee against loss of principal—are a promising option. America has more than enough resources to make sure, as it did in the 1930s, that its seniors won’t be facing their last years fearing penury.
While Chapter 7 or Chapter 13 bankruptcy can offer seniors a way to handle debt trouble, it’s important to understand what bankruptcy can and cannot do. For many seniors, certain issues crop up relating to home ownership, Social Security, and retirement funds. And some seniors may find that their income and assets are protected even without filing for bankruptcy.
For most seniors considering bankruptcy, there are two options: Chapter 7 and Chapter 13.
In Chapter 7 bankruptcy you discharge most or all of your debts and turn over nonexempt assets to the bankruptcy trustee who will sell the property and use the proceeds to pay your creditors. Chapter 7 is available to those whose income is below the median income in their state or for those who pass a means test that indicates that they do not have enough disposable income to fund a Chapter 13 repayment plan.
In Chapter 13 bankruptcy, you keep your assets and property and repay some of your debts through a payment plan that lasts either three or five years. Chapter 13 is available for those who are not eligible for Chapter 7 or for those who want to keep more of their assets than a Chapter 7 bankruptcy would allow.
In Chapter 7 bankruptcy, if you have significant home equity that is not covered by a homestead exemption (an amount that is protected in bankruptcy) the bankruptcy trustee will sell your home to pay your creditors. Often, seniors are more at risk of losing their homes since many have paid off their mortgages or have large amounts of equity in their homes.
The amount of equity that is protected in your home varies by state. Some states protect the full value of your home. Some protect only a small amount. In Chapter 13 bankruptcy, you keep your home as long as you continue to pay your mortgage. Chapter 13 also provides a method for paying mortgage arrears
Retirement Accounts in Bankruptcy – Many seniors rely on retirement accounts to fund their golden years. Most retirement accounts are protected in bankruptcy.
Almost all tax-exempt retirement accounts are protected in Chapter 7 bankruptcy by federal law, including 401(k)s, 403(b)s, profit-sharing and money purchase plans, IRAs, and defined-benefit plans. With one exception, the exemption amount is unlimited — which means you can exempt the entire amount in the account. The exception applies to traditional and Roth IRAs — those accounts are exempt up to a combined total of $1,245,475.
Since you keep your assets in Chapter 13 bankruptcy, all of your retirement accounts are safe.
Social Security Income in Bankruptcy – In Chapter 7 bankruptcy, income you receive from Social Security or Social Security Disability is protected. Nor is this income “counted” for purposes of the Chapter 7 means test. This means you are likely to qualify for Chapter 7 bankruptcy if all or most of your income comes from Social Security.
In Chapter 13 bankruptcy, your Social Security income is included when determining how much you must pay each month through your repayment plan. To learn more about how Social Security income is treated in bankruptcy, see the Social Security brochure, Is Social Security Safe During Bankruptcy. Is Your Income Protected Without Bankruptcy?
If you are a senior with little income other than Social Security and not many assets, your income and property may be protected even if you don’t file for bankruptcy. Creditors who get judgments against you cannot take your Social Security income and can only take up to 25% of your other wages (less if your income is very low). There are a few exceptions to this rule. Creditors can often take some of your Social Security income when collecting certain tax debts, student loans, and child support.
If you don’t own your home (or don’t have any equity in your home) or a fancy car, expensive jewelry, or other pricey assets, then creditors don’t have assets to take from you. Almost all states protect clothing, furnishings, some equity in a car, and other basics.
If creditors cannot go after your income or property, then think twice about whether bankruptcy is necessary.