Bankruptcy May Be the Better Choice for Debt-Laden Seniors

The conventional wisdom is that you should always pay off your debts, but that may not make the most financial sense for some debt-laden seniors. In certain cases, filing for bankruptcy may be the better choice.

Many seniors are struggling with large credit card bills and monthly debt that exceeds their income. Rather than drawing down retirement assets, bankruptcy may make sense for these individuals – especially if they have already paid off their mortgages – because they will be less affected by poor credit ratings. Filing for bankruptcy can also eliminate a senior's existing medical bills. Another benefit is that most retirement accounts are exempt, which means the funds do not have to be sold during bankruptcy proceedings.

There are two types of bankruptcy for individuals: Chapter 7 and Chapter 13. With Chapter 7 bankruptcy, you can discharge all of your debts, but you must sell some of your property to pay your creditors. However, many assets (like the equity in your house) are protected from bankruptcy, so in reality you may not have to surrender any property. In order to file Chapter 7 bankruptcy, you need to pass a means test, and if your income is too high, you may not qualify. (Social Security benefits do not count toward income.) Chapter 13 bankruptcy requires you to pay back your debt over time, but you are not required to sell any property. To qualify, you need to be able to show that you have the ability to slowly discharge your debt.

Bankruptcy is not the right choice for everyone, however, and seniors should consult their attorney before making any decisions. For example, while bankruptcy gets rid of existing medical debt, it doesn't do anything about ongoing debt. In addition, Social Security and pensions are exempt from debt collection, so low-income seniors may not need to worry about debt as much. Many people feel morally obligated to pay off debt, and walking away from debt means higher fees and interest rates for others, so the decision to file for bankruptcy should not be taken lightly.

A May 13, 2015, New York Times article discussing the bankruptcy option for seniors suggests trying to negotiate with creditors first.  “A lot of people who jump into bankruptcy never know what settlement they could have had,” says one attorney. 

For more information about bankruptcy from the U.S. Courts, click here.