Retirees and Bankruptcy

People are supposed to relax when they retire, not worry about financial problems. Studies show that a lot of retirees turn to alcohol for debt relief, but there is a better way than booze:  Bankruptcy.

The mere word makes a lot of people cringe, especially people over 65. They were raised in an era that emphasized personal responsibility, and one of the biggest responsibilities is paying your bills.

But that’s becoming increasingly difficult for many retirees. A study released in August of 2018 found that three times as many retirees are filing for bankruptcy than in 1991.

The report, titled “Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society” was conducted by the Consumer Bankruptcy Project. It reported that 12.2% of all bankruptcies are filed by people 65 and older. That figure was only 2.1% in 1991.

Tracing the bankruptcy boom is not hard:

• Medical expenses are skyrocketing
• Retirement savings are non-existent or barely exist. More than one in five Americans have zero retirement savings and another 10% have less than $5,000 in savings.
• Senior citizens with student loan debt has quadrupled over the last decade.
• Pensions have all but disappeared and many of those remaining are underfunded.

In addition to statistical data, the survey used questionnaires from 895 people who’d filed for bankruptcy.

“Older Americans report they are struggling with increased financial risks, namely inadequate income and unmanageable costs of healthcare, as they try to deal with reductions to their social safety net,” the study said. “For an increasing number of older Americans, their golden years are fraught with economic risks, the result of which is often bankruptcy.”

That result is no silver bullet, however. Unlike someone who files bankruptcy in their mid-30s, people in their mid-60s or older simply don’t have time to get back on their feet.

The chances of finding a good-paying job are slim, and their medical expenses will likely continue to rise.

The question is: How do I get out of debt now that I’m retired?

The sad fact is there is often no good answer. Financial help for seniors is hard to come by, but in many cases bankruptcy can be part of the answer.

The first thing retirees must do is accept that there is nothing shameful about filing for bankruptcy as a senior citizen. Given how society has evolved, it’s surprising more people don’t do it.

A 2018 analysis from Fidelity Investments estimated that a healthy 65-year-old couple will need $280,000 to cover health costs alone through retirement. That’s up from $160,000 in 2002 and not likely to decline.

On top of that, pensions have gone the way of the dinosaur. In the mid-1980s, 46% of private-sector workers were in a pension plan, according to the Employee Benefit Research Institute.

Then came changes in tax laws that ushered in 401(k) retirement plans, which left employees largely in charge of their retirement savings plan. Now less than 20% of workers are on pension plans, and 401(k) plans have proven to be a poor substitute for many employees.

American’s retirement system wasn’t prepared for these long-term structural changes, and many retirees have been caught in the pinch.

One respondent in the study said this: “All things went up in price, but retirement benefits never went up. Had a part-time job that was helping to meet monthly payments. House payment kept going up. Was fired from my part time job that I had for over 10 years without any warning. Being 67 and having back problems, not many people will hire you even as part-time worker.”

His story could be repeated 100,000 times a year. That’s approximately how many retirees file for bankruptcy each year. It’s a minor segment of overall filings, but researchers said it indicates a much larger segment that’s in financial distress.

“Distress” is a subjective term, but consider the numbers. The median household led by someone 65 or older had a liquid savings of $60,600 in 2016, according to the Employee Benefit Research Institute.

The bottom 25% of households had saved at most $3,260. Going to bed at night with that on your mind can cause distress.

There are good ways to try to deal with it, like yoga or hitting the gym. Then there are bad ways, like hitting the bottle.

A study by the State University of New York at Albany found that males 65 and over are 30% more likely to drink when they encounter financial stress. Female seniors, however, are 20% less likely to increase their alcohol consumption when hard times hit.

The Consumer Bankruptcy Project study found that stress becomes a long-term companion with many seniors. Nearly 20% of them struggled with debt for five years or more trying to fight off bankruptcy.

About 40% struggled for two to five years. Obsessing about bills is no way to spend your golden years.

If you are drowning in medical bills or credit card debt, bankruptcy can offer some blessed relief. There are two options – Chapter 13 and Chapter 7.

With Chapter 13, the debtor keeps their property and commits their disposable income toward paying down their debt. It’s basically a three-to-five year repayment plan.

Most people opt for Chapter 7, in which assets are sold to pay off their debts. It offers a fresh start and the process usually takes four to six months.

In both Chapter 13 and Chapter 7, a filer’s Social Security benefit is not affected and pension and retirement fund plans are typically protected from creditors.

Choosing between Chapter 13 and Chapter 7 is important, but the biggest step is just deciding to take action.

Bankruptcy doesn’t just eliminate bills, it can eliminate stress. And it’s a much healthier option than trying to drink your worries away.