Are you eligible to file for bankruptcy in retirement?
The short answer to that question is a resounding yes. Retirees can pursue Chapter 7 and Chapter 13 bankruptcy — and many certainly do. In fact, bankruptcy is on the rise among adults aged 65 and over, according to a number of sources.
Now, with that said, there are still many questions personal to you that need to be asked.
Bankruptcy is a process with many moving parts, and is ultimately closely tied to the specifics of your unique circumstances. Retirees can pursue bankruptcy — but the matter of whether an older adult should consider bankruptcy, or the effects this process may have on their finances and lifestyle, are far more individual.
Retirees and Bankruptcy, By the Numbers
In recent years, experts and researchers have noticed what many are calling a “graying” of bankruptcy in America. Even as the total number of bankruptcy cases in the U.S. has fallen over the past several years, the share of total bankruptcies among those 65 and older has increased. According to reports, adults over 65 accounted for just about 2 percent of bankruptcy filings in 1991. By 2016, however, that same group accounted for more than 12 percent of all bankruptcy filings. That means that roughly one out of seven people who files for bankruptcy in the U.S. is now 65 or older.
Bankruptcy experts largely attribute this spike in bankruptcies among older adults to a number of common problems that retirees face as they enter their golden years, specifically:
- Rising medical care costs of medical care. Research from one financial services company projects that the average American couple would need $280,000 to cover health care and medical expenses throughout retirement, as of 2018 — a 75 percent increase since 2002, when the company’s estimate sat at just $160,000.
- Increasing amounts of debt. Beyond medical bills, studies have shown that older adults are juggling more debt than ever before. According to data from the U.S. Federal Reserve, almost half of the population 75 or older had debt as of 2016, up from just one in five as of 1989. Older adults are also balancing multiple types of debt, including mortgages and even student loan debt, in some cases.
- Decline in pensions and sources of retirement income. As the population grows older, our current system of pensions is hard-pressed to keep up. As a result, fewer retirees are enjoying reliable pensions after their careers. 401(k)-style savings can fluctuate, and many older adults are tapping into social security earlier in life, which can lead to financial penalties.
Bankruptcy, Assets, and Exemptions: Some Key Considerations In Retirement
For retirees researching bankruptcy and all that comes with it, there are a number of key considerations to keep in mind — including the types of bankruptcy that retirees may be able to use, which offer different benefits, drawbacks, and limitations.
At the same time, many older adults are curious about how bankruptcy may impact their most important assets, and their lifestyle goals in retirement.
Chapter 7 and Chapter 13: What Retirees Need to Know
For business owners, wage owners, and retirees alike, there are two primary types of consumer bankruptcy to be aware of: Chapter 7, and Chapter 13.
- Chapter 7 bankruptcy. Also called “liquidation” bankruptcy, Chapter 7 generally involves the debtor liquidating some or all of their non-exempt assets in order to pay down debts, while also having many of their outstanding unsecured debts discharged. There is a means test required for Chapter 7 bankruptcy. Overall, the Chapter 7 process is closely observed and directed by a bankruptcy trustee, and generally takes several months to complete.
- Chapter 13 bankruptcy. Also called a “reorganization” or “restructuring” bankruptcy, Chapter 13 allows the debtor to work up a repayment plan with the court and their creditors, to help pay off set amounts over a set period of time, usually three to five years. At the end of this process, the debtor may have some of their remaining unsecured debts discharged, freeing them from remaining liability.
How Will Bankruptcy Impact Retirees’ Finances, Assets, and Goals?
For retirees, it’s important to weigh the short-term and long-term impacts of bankruptcy, and what they may mean when it comes to the most important things in your life. For older adults, bankruptcy can be a powerful tool for debt relief and reorganization, but it is also not without its limitations.
Here’s a quick look at how bankruptcy may come into play for some factors that are important to many retirees:
A common worry is that filing for bankruptcy will always force you to give up your home — a particularly challenging thought for debtors in retirement. While some types of bankruptcy may impact your assets, there are also protections and exemptions in place that may help you shield some of your property. The Illinois homestead exemption, for instance, is designed to help owners preserve equity in their residences and keep the roof over their heads. Chapter 13 bankruptcy can also allow debtors to restructure their monthly debts and make them less of a regular burden, without necessarily having to liquidate their property.
When filing for bankruptcy, an experienced local attorney can help you address these common concerns, and understand the protections you can use to keep the things that are essential and important to you.
Social Security, Pensions, and Retirement Accounts
Discussing the details of your situation with an experienced bankruptcy attorney can help retirees understand the impact of this process on Social Security, retirement accounts, and pensions. Broadly speaking, debtors can typically protect many retirement accounts in Chapter 7 bankruptcy, including 401(k)s, 403(b)s, IRAs, and defined-benefit plans. Income received from Social Security or Social Security Disability is also protected.
Medical Bills and Unsecured Debts
Generally speaking, many people consider bankruptcy as a means of financial relief because it can allow debtors to automatically discharge many unsecured debts — that is, debts that are based purely on one’s promise to pay them back, usually with interest. Many common types of debt affecting seniors can often be discharged in bankruptcy, including many medical bills, unsecured credit card debts, personal loans, and some utility bills. At the same time, it’s also important to remember that bankruptcy will not allow you to immediately discharge all of your debts, and you may still be liable for some common debts in bankruptcy, including taxes, student loans, and child/family support obligations.
Want to Keep the Discussion Going?
Ultimately, there are many crucial considerations to factor in when weighing the possibility of bankruptcy in retirement — including the timeline, the type of bankruptcies available, and whether this process is the right course of action for your unique situation.
A knowledgeable bankruptcy attorney can help you get a handle on the variables of your situation — including your personal lifestyle goals, your level of income, and the types of debt you owe — which can help empower you to know your options, including the potential for pursuing sound bankruptcy alternatives with the oversight and guidance of your legal professional.
If you are a retiree looking to get a better understanding of bankruptcy in the Chicagoland area, do not hesitate to get in touch with the Gunderson Law Firm. We can get you actual, straightforward answers for your personal situation, and your first consultation with us costs you nothing.
At the Gunderson Law Firm, we strive to protect our clients’ assets to the full extent allowed by today’s laws throughout the complex bankruptcy process, helping them get the debt relief they not only need, but genuinely deserve. We can help address your specific situation with strategic plans to help put severe indebtedness behind you, so you can enjoy life again. Drop us a line whenever you’d like to keep the discussion going.