Senior Citizens and Bankruptcy: What You Need To Know

What Is Bankruptcy for Seniors?

Bankruptcy is a legal proceeding that can provide relief to those unable to repay debts. While everyone’s situation is different, senior citizens typically file either Chapter 7 or Chapter 13 bankruptcy to resolve heavy debt burdens.

Medical bills and credit card balances can become a significant burden in the golden years, especially since many older adults live on a fixed income. If you’re approaching retirement or are already retired, making hefty debt payments each month can be challenging.

For some older adults, bankruptcy may be the best tool to get a fresh start so they can enjoy their retirement. Many factors, including financial situations, home equity, and income, help determine whether this is the right step.

However, bankruptcy should be viewed as a last resort and a drastic step, so weighing the benefits and consequences before making a decision is important.

Should I File for Bankruptcy as a Senior?

It’s crucial for older adults to consult with a bankruptcy lawyer about whether their assets will be exempt and the type of debt that can be addressed through bankruptcy. Assess whether your protected assets, such as Social Security and retirement income, are sufficient to cover essential living expenses.

If you have significant home equity or valuable property, these may be at risk in bankruptcy. Additionally, determine whether the amount of discharged debt justifies the costs of filing and attorney fees.

You can file for Chapter 7 bankruptcy if your income is low enough to pass the means test. If not, you may have to file for Chapter 13 bankruptcy, which involves a repayment plan of three to five years. Many older adults may struggle to afford those monthly payments.

Why Is Bankruptcy as a Senior Different?

Senior citizen bankruptcy is different from bankruptcy for other age groups due to the factors you need to consider when deciding if it’s right for you. Unlike younger individuals, senior citizens may have fewer financial recovery opportunities, making it essential to explore all alternatives before considering bankruptcy.

However, if you’re in debt and retired, there are unique factors to consider before opting for bankruptcy as a solution. For example, medical costs and inflation have a much bigger impact on older adults with complex health issues and fixed incomes. This makes eliminating medical debt a higher priority for many seniors.

On the other hand, some seniors may have a significant amount of equity in their homes, so protecting their equity may be a priority.

Another unique challenge is that seniors may have limited time to recover financially, and bankruptcy is not an instant solution. While the legal proceedings are the same for all adults, bankruptcy can significantly affect the credit and financial standing of older adults, often leaving them without sufficient time to rebuild their credit history.

How Bankruptcy Impacts Seniors' Finances

While most assets held by seniors, such as retirement income and 401(k)s, are protected in bankruptcy proceedings, it’s important to learn more about any bankruptcy exemptions that may apply to you.

Here are some of the key financial factors typically protected in bankruptcy:

Retirement Savings

Most types of retirement accounts are protected during bankruptcy proceedings. For example, in Chapter 7, pension plans, 401(k)s, and IRAs are protected. As of 2024, the federal bankruptcy exemption limit for Roth IRAs and IRAs was $1,512,350.

This means that any amount above the bankruptcy exemption limit will not be safe. However, for many senior citizens, the remaining amount is enough to support them during their retirement years.

In Chapter 13, you’ll be able to keep your assets, so your retirement accounts are also protected.

Social Security Benefits

Social Security benefits are generally protected during bankruptcy, but they must be kept in a separate account to maintain their exempt status. If you merge your Social Security benefit amount with your IRA or savings amount, they can lose their protected status in bankruptcy proceedings.

If you’ve already merged your Social Security benefit money, it's best to discuss your next steps with an attorney.

When Does Bankruptcy Make Sense for Seniors?

To determine whether bankruptcy is beneficial for you as a senior, consider these points: Bankruptcy might be right for you if:

• You have the type of debt that can be discharged in bankruptcy.
• You can protect most or all of your property.
• You can use Chapter 13 bankruptcy to catch up on car or home payments.
• You’re able to pass the means test for Chapter 7 bankruptcy.
• You can discharge enough debt to make the lawyer fees, filing fees, and other costs worth it.

Bankruptcy for Medical Debt

For senior citizens, it may make sense to file for bankruptcy if they’ve amassed a lot of medical debt. Bankruptcy may be a viable alternative for retirees whose income has decreased and whose obligations have accumulated.

An overwhelming amount of senior credit card debt may be another situation where bankruptcy makes sense.

Bankruptcy Risks

Teresa Dodson, a financial expert and the founder of Greenbacks Consulting, shares her thoughts on whether seniors should consider filing for bankruptcy.

“Filing for bankruptcy as a senior may come at a higher risk,” warns Dodson. She explains that seniors typically have no further earning potential and often have most of their money invested in accounts or assets.

“Seeking an attorney to help protect them during this process is a must,” she adds.

How To Determine If You're Eligible for Bankruptcy

Here’s a list of eligibility requirements for Chapter 7 and Chapter 13 bankruptcy:

Filing Chapter 7 Bankruptcy

• You must pass the means test.
• You must not have filed a petition that was dismissed by the court in the last 180 days.
• You must not have a previous Chapter 7 bankruptcy in the past eight years or a Chapter 13 bankruptcy in the last six years.
• You must complete a debt counseling course no more than 180 days before filing.

Filing Chapter 13 Bankruptcy

• Your combined total secured and unsecured debts should be no more than $2,750,000.
• You must demonstrate a regular income.
• You must have filed your tax returns regularly with no past-due Federal or State taxes.
• You must not have filed a petition that was dismissed by the court in the last 180 days.
• You must not have filed a Chapter 13 bankruptcy in the past two years or a Chapter 7, 11, or 12 bankruptcy in the last four years.

What You Need To File for Bankruptcy as a Senior

Before filing for bankruptcy, seniors must gather important documents to determine their eligibility and ensure their assets are protected. These records enable bankruptcy courts to assess income, debts, and exemptions, thereby making the process smoother.

Consulting with a law firm that specializes in bankruptcy can clarify which documents you need for your case.

Documentation for Bankruptcy

The type of documents you’ll need to submit for bankruptcy as a senior citizen will depend on which chapter you’re filing under. In most cases, you may need:

• Proof of income for the last six months
• Recent bank statements
• Tax returns for the last two years
• Retirement account and brokerage account statements
• Appraisals for any property you own
• Documents related to your assets, debts, and income
• Certificate of completion for the mandatory credit counseling session

Bankruptcy involves a lot of paperwork. You’ll need to fill out a bankruptcy form, which includes many detailed questions about your assets, debts, expenses, and income. An attorney with a knowledge of bankruptcy law can help you complete the necessary forms.

Alternatives to Bankruptcy in Retirement

Senior citizen bankruptcy is not the only way to address debt. Here are other effective options to consider:

Financial Assistance Programs

Many Americans qualify for senior assistance programs that can reduce their expenses, freeing up money that can be used for debt repayment. From nutrition programs like SNAP to health care benefits like Medicare and Medicaid, you may qualify for financial assistance from the government as well as nonprofit organizations.

Debt Consolidation

If you're facing multiple unsecured debts, you can consolidate them all into a single loan at a lower interest rate if you consolidate. Debt consolidation may make it easier to pay off your debts by reducing the interest you pay over the life of the loan.

Debt Settlement

You can also consider debt settlement to pay less than what you owe to your creditors. If you're at least six months past due on payments and can come up with a lump sum payment, your creditors may be inclined to accept the offer.

Working with a professional debt relief organization, such as TurboDebt®, can make the process easier.

Consider Your Debt Relief Options

Filing for bankruptcy is often a complex process. It’s not a simple decision, and it’s always a good idea to talk to an experienced bankruptcy attorney before you file to determine if it’s the right solution for you as a senior.

Take some time to carefully review your finances and explore all your debt relief options first. For older adults, numerous senior financial assistance resources are available, including housing aid, grocery stimulus programs, and other key options that can significantly alleviate your financial burden.

Seniors Can Pay Off Debts with Help from TurboDebt®

Avoid bankruptcy and get the assistance you need to pay off debt with help from TurboDebt®. We help seniors eliminate big balances, typically faster and for less than other debt relief solutions.

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Contact our expert team today and get started with a free consultation. It's time to start living your best financial life in your golden years!