Retirement is meant to be a time when you can finally relax and do the things you want without having to worry about earning an income and paying your bills. Unfortunately, with the cost of living and other expenses skyrocketing today, more and more retirees are finding it difficult to get by on their social security, pensions, and other retirement savings.
Since 1991, the number of retirees filing for bankruptcy has tripled, with 12.2% of all bankruptcies being filed by people 65 and older. Though every situation is unique—depending on how much money you made prior to retiring, how much you invested into savings, and how much external support you have from friends and family—the average senior citizen only has around $5,000 or less in savings.
Furthermore, in addition to what little savings people have after they retire, social security is also often not enough to help pay even basic costs, such as rent or mortgage, food, car payments, healthcare, and other essential bills and expenses. Pensions have also mostly disappeared or have become significantly underfunded. And student loan payments are often even a burden for senior citizens today.
Unfortunately, all of this adds up to bankruptcy—something that is already scary to deal with as is but can be even more overwhelming and frightening for seniors. However, though bankruptcy can be a good option, it is not always the best option, especially if you are retired.
Bankruptcy Options as a Retiree
Before determining if bankruptcy is right for you, it’s helpful to understand your options. As a retired senior, you have two options when filing for bankruptcy:
- Chapter 13: In a Chapter 13 bankruptcy, your property and assets are better protected, but you will need to have a disposable income available. This is because you will instead agree to a repayment plan for a three to five-year period in which you will make a more affordable payment that will go towards your debts and creditors, so you don’t have to sell off what you own for the money.
- Chapter 7: In a Chapter 7 bankruptcy, your assets are not protected, as they will be sold off to pay your debts. However, this option is usually the choice most retirees make as they don’t typically have the disposable income needed to make payments as required in a Chapter 13 bankruptcy. Also, at the end of a Chapter 7, all of your remaining debt will likely be discharged or wiped out, which leaves you free and clear. This might not be a good option, though, if you have too many unprotected assets.
Questions to Consider Before Filing for Bankruptcy After You’re Retired
When determining if bankruptcy is right for you, there are generally two things you should keep in mind:
- You might not have anything a creditor can take. Often, seniors will file for bankruptcy to protect themselves and their assets from creditors. But, it’s important to understand that creditors are not allowed to take whatever they want just because you can’t pay them. A creditor cannot take away certain essential things that you need to live, such as a car, household goods, social security funds, and some retirement accounts. So if these items make up the majority of your assets, then filing for bankruptcy might not be necessary. You will still get calls from creditors demanding you make payments, but there is nothing they can do to force your hand if you don’t have the money or any assets for them to take.
- You have too many unprotected assets. In contrast to the situation above, some people do have a lot of unprotected assets that creditors could take, but these assets could also be taken if you file for bankruptcy. If you file a Chapter 7, your property will likely be sold to pay your debts. And in a Chapter 13, while you would get to keep your property, you would have to make higher payments to compensate, which is often not an option if you don’t have the disposable income to do so.
Other questions and things to consider when determining if bankruptcy is right for you include:
- Is your debt the type that can be discharged in Chapter 7?
- What property and assets do you own, and would they be exempt?
- How much money do you have coming in from your various retirement accounts? If it’s too high, you might not qualify for a Chapter 7.
- If you are willing to give up some of your property or assets, will you wipe out enough debt to make it worth it?
- How much of your debt is medical and credit card debt? These are easiest to wipe out with a Chapter 7.
- How much equity do you have in your home? The homestead exemption can protect a certain amount, but it will vary by state.
- Most retirement accounts are exempt, but not all. So make sure you know what type of accounts you have and which ones are protected.
- How much are your social security benefits? Social security is protected so long as it remains in a separate account from other funds. However, social security is considered income and will be calculated as part of your income should you decide to file for bankruptcy, which could make you ineligible for a Chapter 7.
How Bankruptcy Affects Your Retirement Accounts
Most retirement accounts are exempt, meaning if you file for bankruptcy, they are protected, and you get to keep them. However, there are some limitations and exceptions.
All ERISA-qualified accounts that are protected include:
- IRAs (limitations noted below)
- Profit-sharing plans
- Money purchase plans
- Defined benefit plans
General savings accounts, investment accounts, and stock options will not be protected if they are not ERISA-qualified. For IRAs, there is a limitation. With IRAs and Roth IRAs, the exemption is limited to $1,512,350 (adjusted every five years) per person. So if you have more than this, it can be used in bankruptcy to pay back creditors.
Withdrawn retirement benefits are also not exempt. Funds that remain in your retirement account are protected, but as soon as those benefits are paid to you, they are considered income and are not exempt.
How Sawin & Shea, LLC Can Help
Bankruptcy can be scary and overwhelming for anyone, but even more so once you have retired. At Sawin & Shea, we are dedicated to providing compassionate service to our clients to ensure the best possible outcome. If you are retired and have questions or concerns about filing for bankruptcy, we can offer you guidance and help you make the right decision. Give our office a call today at 317-759-1483.