While unpleasant to think about, an unfortunate reality is that many people find it necessary to file for bankruptcy in retirement.
In fact, according to a 2018 study, the number of Americans over age 65 who file for bankruptcy has tripled since 1991.
What factors have led to increased retiree bankruptcies?
While many retirees find themselves in financial trouble simply due to inadequate retirement savings, there are other factors behind the increase in retiree bankruptcies, including:
- The disappearance of employer pension plans
- Higher medical costs
- Increases in student loan debt
If your debt has become unmanageable due to loss of income or increased payments, filing for bankruptcy may seem like a good solution.
What to consider before filing for bankruptcy?
There are two options when filing for bankruptcy protection: Chapter 7 and Chapter 13.
If you file for Chapter 7, your assets are sold to pay off your debts.
This could include your home if a lot of equity built up and it isn’t covered by a homestead exemption.
This type of arrangement is for people who don’t have enough income to repay their debts, or for those whose income falls below the median level in their state.
In a Chapter 7 bankruptcy, your credit card debt, personal loans, utility bills, and any medical debt can be discharged. That means you won’t have to repay any of those bills. Car loans, mortgages, tax bills, child support, and most student loans are non-dischargeable.
If you don’t own a home, a good car, or valuable jewelry, it may not be worth filing for bankruptcy, since you have no assets for creditors to seize.
In a Chapter 13 bankruptcy, you keep your assets (including your home) and set up a repayment plan for your debt—a process that may take up to five years.
Differences between pre-retirement and in-retirement bankruptcies
If you’re filing for bankruptcy before you retire, the money you have in any company-sponsored retirement plan is protected from creditors.
Money in an IRA—including traditional, Roth, SEP, SIMPLE, and rollover IRAs—is generally safe, but only up to a certain dollar amount.
Until April 1, 2022, the federal bankruptcy protection limit is $1,362,800 across all IRAs you own (except those you have inherited—they are exempt from federal bankruptcy protection). After that, the limit is adjusted every three years depending on the cost of living.
If you’ve already retired and you plan to file for bankruptcy, things are a little different.
If you file for Chapter 7, any money you withdraw from your retirement accounts above and beyond what you need to support yourself is subject to creditors.
In a Chapter 13 bankruptcy, your retirement income will probably be included in the calculations for your repayment plan.
Additionally, Social Security benefits are subject to creditors. If your bank account balance includes those benefits, your bank is required to protect two months’ worth of benefit payments from your creditors.
Reduce the risk with financial planning
While sometimes inescapable due to unexpected expenses like medical bills, the risk of having to file for bankruptcy in retirement can be mitigated with the help of a comprehensive financial plan created by a professional advisor.
If you’re already in a situation where bankruptcy seems necessary, you should consult a financial advisor first.
They can help you determine the right type of bankruptcy to file, or even figure out a way to solve your debt challenges without going through the bankruptcy process.