While the news media focuses most of its efforts on covering the economic downturn and its effect on the young and middle aged populations, there is a silent yet growing contingent of Americans who are facing financial hardships and the potential loss of their lifetime homes. In a recent report by the American Association of Retired Persons (AARP) and the Consumer Bankruptcy Project, bankruptcy rates among senior citizens is rising faster than any other demographic. From 1991 to 2007, the rate of personal bankruptcy filings among those ages 65 or older jumped 150%. Moreover, the rise among those ages 75 to 84 spiked to a staggering 433%.
The study didn’t specify reasons for the increase, but trends focus on rising medical costs and the financial hardships faced by seniors after the loss of a spouse. Bills that were once affordable for two incomes become insurmountable alone. The scenario becomes even more crippling because this population has prided itself on their financial prowess. Up until retirement age, they earned a living, raised their families, and even helped their children and grandchildren through colleges, weddings and other needs. To be the family member who is now faced with financial hardship is embarrassing and emotionally devastating.
When retirees or those approaching retirement find themselves over-extended financially, there are a number of pitfalls that can make a bad financial situation disastrous.
Top Five Financial Pitfalls for Seniors
1. Draining a 401k or pension. Not only for the obvious reason that they will need that money throughout retirement, but also because they could have kept 100% of what is in their pension if they still have to file a bankruptcy, accessing the 401k or pension to pay down debt is not a good solution.
2. Take out a home equity loan. In New Hampshire, a married couple can have up to $200,000 in equity in their home that is exempt from their creditors. Voluntarily giving that equity to creditors through a mortgage on their home creates the risk that when seniors can’t make the equity loan payment, they now can face a foreclosure instead of just a few calls from a credit card company. It also ensures that if they still have to file for a bankruptcy that they can no longer get rid of this debt unless they want to give up their home.
3. Liquidate property to generate money for living expenses and to pay credit cards. As the credit card industry continues to increase minimum payments on credit cards, consumers often look for a ‘quick fix’ to stop the phone calls. Some people sell their assets for less than they are worth. This is rarely a good idea and is usually just a ‘band-aid’ that doesn’t provide a global solution to their debt. If selling some of your possessions is only going to allow you to “tread water”, i.e. pay the minimums but not substantially reduce your overall debt, then it makes no financial sense to do this.
4. Signing up for debt consolidation. Lump sum settlement businesses sell their products by claiming that they can rid of 50% of your debt or more. They never tell prospective customers that the forgiveness of debt will result in the issuance of an IRS Form-1099 that can result in taxable income. Tax problems will further complicate the debtors’ financial woes. They also never tell consumers that the credit card companies or collection agencies do not have to accept the program. I have had several clients come to me after getting sued for a debt that they thought was part of this program.
5. Participate in credit counseling to lower interest rates. The monthly payment that is arranged by a counseling service is determined by what the credit cards are willing to do not by what you can afford. Credit counselors always sign people up before they know what the credit cards are willing to do and take the first few payments for their fee up front. I have had several unhappy clients come to me after having made all the required payments but after several years could see that the payoff period is a lot longer than they were promised when at the beginning. A cynical person might believe that the financial contributions that the credit card industry makes to these nonprofit credit counseling agencies has influenced the agencies’ decisions.
6. Using credit cards to pay credit cards or other living expenses. Is the person:
• Using credit cards to pay other credit cards?
• Using credit cards to pay for food or gas so you can continue to afford to pay the credit cards?
• Taking cash advances on the cards to afford your life style?
• Transferring credit card balances in order to get a better rate?
If the only way seniors are able to make their credit card payments is by doing one of the actions above, this is huge ‘red flag’ that your financial situation is out of control. Like a ‘house of cards’ that crumbles under the weight of too much load, compounding debt onto other debt just creates an unstable structure that is destined to collapse sooner or later. Once seniors begin to fall into this trap, the amount of debt will spiral out of control very quickly.
If you see any of the above warning signs in your situation or in that of your aging parents, you might want to consider speaking to a certified bankruptcy attorney before an irrevocable decision affects a home or other property. Denial is the number one defense mechanism for people in financial difficulty. It’s an intricate conversation to have with aging parents (or even a spouse who has always handled the family’s finances), but a necessary one. In a Crestwood Associates survey of 525 adult children and 525 seniors, nearly “two-thirds of seniors had not spoken with their children about their finances,” writes Jane Adler in a Northern Real Estate Online article. “Of the adult children surveyed, only one-third had confidence in their parents’ retirement finances.” There’s a tremendous amount of unspoken worry about money that’s never articulated. This unspoken cycle helps to breed fearful behaviors and leads seniors to make uninformed and risky decisions.
“It can get very difficult when parents perceive the role reversal between the parent and child,” says Bonnie Roberts, Certified Senior Advisor and owner of Home Helpers Londonderry. “Communication problems arise because the children are coming from a financial perspective. The parents’ perspective is more focused on taking care of the child with financial legacies and other responsibilities.”
Remember that regardless of age, the individual needs a respectful conversation that identifies concerns and uses emotions to open the doors to communication. Phrases such as, “I am worried about this issue,” or “I read an article about this issue and it scared me,” can help to humanize the conversation. Be reminded that aging parents are adults too. They have the right to not accept help or follow suggestions.
Try not to overwhelm a senior with too many facts or demands. “As people age, the brain doesn’t process information as quickly,” continues Roberts. “It takes longer to retrieve and process. If the parent is bombarded with questions, it’s going to overwhelm her and put her on the defensive.” Always respect the individual’s privacy. Unless the child has power of attorney over the parent’s finances, the decisions the parent makes are hers alone.
If people see themselves or a loved one in any of the above situations, it might be in their best interest to consider talking with a certified bankruptcy attorney before external pressures like threats of lawsuits, foreclosure, repossession, and attachments begin to cloud your judgment. Those who survive bankruptcy in the best way are those that did not wait until the last minute to consider one because they didn’t fall into the pitfalls cited above.