Case Study: Bankruptcy during Retirement

Picture This Scenario:

You and your spouse have been enjoying retirement for years, especially the financial stability that comes with it.  The thought of running into extreme financial difficulty was never really a thought in planning for retirement, especially with all the thought and consideration that was taken prior to making that decision.  However, because of the severe downturn in the economy, unforeseen medical illness that brought about substantial medical bills, credit card debt that is rising steadily, or any other severe financial strain, you are being confronted by a difficult question:

Does bankruptcy make sense in retirement?


Increasingly, seniors are encountering substantial financial trouble and are looking to bankruptcy courts for relief, whether under a Chapter 7 liquidation or a Chapter 13 plan to restructure and debt repayment.  However, there are several special issues that seniors should consider prior to making such an important decision:

  1. Social Security Income.  Federal law protects Social Security money from garnishment; however, if you choose not to file for bankruptcy, you still need to ensure that your social security payments are deposited into a separate account altogether from any other income or money you have which may not be protected from creditors.
  2. Retirement Funds.  Most retirement assets, such as 401(k)s and pensions are exempted under federal bankruptcy law; additionally, IRA’s are exempted under federal law up to $1,095,000 and seniors filing bankruptcy in states with higher exemptions can use their state statute to increase their IRA exemption amount.
  3. Homestead.  Generally, a debtor’s home is exempt from creditors in bankruptcy as well; however, the amount of the exemption varies by state and some states may only protect a very small amount of home equity which can leave the homestead at risk depending upon what sort of bankruptcy is pursued.
  4. Medical Bills.  Normally, medical bills are classified as unsecured debt and are discharged at the conclusion of a Chapter 7 bankruptcy (however, under a Chapter 13, those medical bills may remain).

Ultimately, after taking into consideration the above special issues seniors may have, the question still centers on whether bankruptcy is truly worth it for seniors.  The basic purpose of undergoing bankruptcy is for debtors to address their debts and be able to move forward with a fresh start.  Anyone who opts to go forward with the process, fundamentally, should have something to protect (e.g. income, assets, and exempt property interests).  If, after assessing their assets, seniors identify themselves as “judgment proof,” and are relatively certain they will remain judgment proof for the rest of their lives, bankruptcy may not be necessary (and creditors, because of a person’s age, are more likely to believe such).

If you or a loved one are facing such a situation and still have questions regarding the best way to handle your situation, it is probably worthwhile to find a bankruptcy attorney near you who can answer your particular questions specific to your situation.  For more information, click here.

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