Factors Seniors Should Consider When Filing For Bankruptcy

For many seniors, mounting debt is an unfortunate, and unavoidable, reality. The reasons could be anything from the high cost of medical care to unpaid credit card balances. A fixed income can also make it difficult to remain financially solvent. Let's look at some factors seniors should be aware of when considering bankruptcy.

Medical Expenses

Unpaid medical bills are the leading cause of bankruptcy among all people, not just seniors. In fact, 62 percent of all bankruptcies are due to medical expenses. Surprisingly, 78 percent of those filing due to medical debt have medical insurance which means that this is not a problem just for the uninsured.

Health insurance has its limits, and for serious or chronic illness, many seniors are forced to begin to spend savings or take out a second mortgage. In many cases, certain medications are not covered by health care plans. Also, long term and custodial care are not paid for by Medicare. These costs, however, can be very substantial.

The good news is that filing for bankruptcy can eliminate all your debt due to medical expenses. However, if you suspect your medical bills will continue to accumulate, you might consider waiting to file. For example, filing for Chapter 7 only addresses your debt at the time of filing; it doesn't include any future expenses.

Mortgage Issues

When you file for Chapter 7 bankruptcy, a trustee is put in charge of selling your nonexempt assets to pay your creditors. Home equity can be part of this sale. However, in some instances, filing for bankruptcy can actually save your home. This is because most states offer a homestead exemption or honor the federal homestead exemption. In some states, senior citizens actually have an even higher benefit for this exemption as compared to other individuals.

Retirement Accounts

Similar to home equity, many retirement accounts are protected from bankruptcy. This is good news for seniors who have substantial savings in 401(k)s. In these accounts, the entire amount is exempt from bankruptcy. The same goes for 403(b), profit-sharing, money purchase, and defined-benefit plans. IRAs and Roth IRAs have a limit on how much is exempt, and this limit is adjusted every three years. Other types of retirement accounts may not be protected from bankruptcy.

Social Security Benefits

By federal law, your social security benefits are protected from bankruptcy. Furthermore, this income generally does not go into calculating whether or not you qualify for bankruptcy (the "means test"). However, if social security funds were commingled with other funds, like in a bank account that receives wages, then creditors might try to claim the money for debt payment. If possible, it's best to keep social security disbursements in a separate account.

If you don't have an account dedicated exclusively to social security funds, you might want to open one. Begin to have all your social security checks deposited to that account, and try not to withdraw from it. Meanwhile, you can use your regular bank account for withdrawals and payments.

Don't Wait Too Long

One of the biggest mistakes that many people make, seniors included, is waiting too long to file for bankruptcy. Instead, they are tempted to take out more loans, often at high interest, in the hope that a solution will come along. This strategy usually only makes things worse.

Bankruptcy is not a punishment. It is a legal process for anyone who is unable to pay their debts. The process puts you back on track financially while protecting the rights of everyone involved.

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