As people live longer, and guaranteed pensions become a thing of the past, more senior citizens find themselves with debt problems. For many seniors, declaring bankruptcy can be a workable solution, but it isn’t always necessary. In this article, you’ll learn how filing for bankruptcy can help and whether it might be a good option for you.
Overview of Chapter 7 and 13 Bankruptcy
Most individuals file either Chapter 7 or Chapter 13 bankruptcy. Here’s how each type works.
Chapter 7 bankruptcy. Chapter 7 bankruptcy discharges (wipes out) particular types of debt, such as credit card balances and medical bills. In exchange, the bankruptcy trustee, a court-appointed official who oversees the bankruptcy case, might sell some of your property for the benefit of your creditors. However, the majority of Chapter 7 filers can keep (exempt) everything they own. Exempt property often includes most retirement accounts, Social Security payments, and a certain amount of home equity.
Chapter 13 bankruptcy. Called the “wage earner’s bankruptcy,” in this chapter you pay back a portion of your debt through a three- to five-year repayment plan. Chapter 13 bankruptcy works for individuals who make too much money to qualify for Chapter 7 bankruptcy, or for those who would stand to lose property that they'd prefer to keep.
How Do I Know If I Need to File Bankruptcy?
Bankruptcy can help you protect your assets by getting rid of mounting bills. For instance, an increasing number of senior citizens are working past the traditional retirement age. If you fall into this category, bankruptcy can help stop creditors from taking your wages. If you’re not working, bankruptcy can help you protect property. Here’s how.
If You’re Still Working
When you fall behind on your bills, your creditors can take steps to collect from you. One way to do so is through a wage garnishment. A wage garnishment allows your employer to take funds out of your paycheck. Bankruptcy can help in two ways:
- wipe out debt before the creditor gets the wage garnishment, and
- stop a wage garnishment if it has already started.
When you file bankruptcy, a protection called the “automatic stay” goes into effect. The automatic stay is an order from the bankruptcy court that says creditors cannot take your money or property without first getting the court’s permission. It immediately puts a stop to creditor collection efforts. (Learn more by reading What Is the Automatic Stay in Bankruptcy?)
If You Have Equity in Your House or Car
Senior citizens often pay on a mortgage for many years and the equity built up in a home might be your only asset. A car that you own free and clear could have valuable equity, as well. If you’re facing repossession of your car or foreclosure of your house, a Chapter 7 bankruptcy can temporarily stop the process and allow you to keep a portion of your equity, depending on your state exemption laws (read more below). Be aware, however, that although you’ll be able to protect some equity, if you’re not current on your payment, or you have more equity than you can keep—and you want to keep the property—Chapter 7 bankruptcy might not be the best choice. You might lose it.
By contrast, Chapter 13 bankruptcy might be a better option because it can give you time to catch up on past due payments so you can keep your house or car. The catch is that you must have a source of income to do so. For more information, read Secured Claims in Chapter 13 Bankruptcy: Can I Catch Up on My House or Car Payment?
Bankruptcy Can Protect Other Assets, Too
You don’t lose all of your property when you file for bankruptcy. You’ll be able to keep the things that you need to work and live, such as:
- household goods and furnishings
- tools used for business
- personal items, such as clothing and wedding rings, and
- retirement accounts.
The laws of your state determine how much property you’re allowed to keep. You can find out more about the property you can protect by reading How to Find Your State Bankruptcy Exemptions.
Am I Judgment-Proof?
If you aren’t working and don’t own significant property, bankruptcy might not be necessary. People without assets that a creditor can take, such as valuable property or money in the bank, are considered judgment proof.
(To learn more, read What It Means to Be Judgment Proof: Your Creditors Can't Collect From You.)
Many areas have agencies that offer senior citizens free or low-cost consultations on legal matters, including debt issues. Additionally, most bankruptcy attorneys offer an initial consultation at no cost and can help you determine whether bankruptcy is right for you.
(If you’re finding collection calls bothersome, read How to Stop Debt Collection Harassment When You’re Judgment Proof.)
Questions for Your Attorney
- Should I file for bankruptcy or am I judgment proof?
- Which bankruptcy chapter is right for me?
- Will I have to give up property if I file for bankruptcy?