Bankruptcy can seem like a useful way to get rid of your debts and reduce the stress caused by collections efforts, but it is often not a good strategy for elderly people. This is because they may have either too much or too little property. If they have acquired or inherited substantial assets over the course of their lives, they would lose this property under Chapter 7 because they could not cover all of it with exemptions. If they file under Chapter 13, they would face very high monthly payments under their repayment plan because they would need to pay back the value of their non-exempt property within three to five years.
At the other extreme, an elderly person who has very little property may lack any assets beyond the bare necessities. This means that they are judgment proof because there is nothing that a creditor can collect. Thus, a senior citizen in this position does not need to file for bankruptcy unless they are anxious about aggressive creditor tactics or concerned about a levy from a bank account.
Issues to Consider Before Filing for Bankruptcy as a Senior Citizen
There are certain threshold issues that any debtor should consider before filing for bankruptcy. These include how much of their debt can be discharged, how much of their property they can cover with exemptions, and whether they owe debts attached to a home or car. But an elderly person should consider a broader range of issues before taking this step.
For example, you may have compiled a substantial amount of equity in your primary residence. The homestead exemption can protect some of this equity, but it may not protect all or even most of it, depending on your state. You might run the risk of losing your home if you file under Chapter 7. Also, you may have accumulated significant bills with health care providers. These may make you interested in filing for bankruptcy, but you should be aware that being judgment proof (if you are) means that a creditor cannot collect on these bills, no matter how aggressively they pursue you.
If you depend on your Social Security benefits, you will be reassured to know that creditors cannot collect from these benefits. You can keep them during bankruptcy if you hold them in a separate account, but you would need to disclose them as part of your income if you file for bankruptcy.
Most tax-exempt retirement accounts qualify for exemptions in bankruptcy, while IRAs and Roth IRAs receive some limited protection. However, if you take money out of a retirement account, this will count as income with regard to qualifying for a certain type of bankruptcy. Funds withdrawn from a retirement account count as cash in terms of exemptions, and usually any exemption for cash covers only a small amount. You should try to keep your retirement withdrawals separate from Social Security benefits so that the Social Security benefits keep their protection. Retirement withdrawals may be subject to a bank levy by a creditor. Read more here about the effect of filing for bankruptcy on your retirement plan.