Getting out of Debt - A Guide for Aging Adults

Debt isn’t fun at any age, but it can be especially scary for senior citizens. Seniors normally don’t have regular paychecks coming in, and the bulk of their income may comprise of Social Security checks. They’re often dealing with life changes such as retirement or medical issues. All of the sudden, they have less money coming in monthly than they have in decades, yet their expenses are greater, and their debt is accumulating.

There are multiple avenues open to seniors, even if a situation seems hopeless. For example, if there’s nothing you can do about your debt, you can still handle debt collectors a certain way so they treat you fairly or leave you alone. That’s a huge burden off your shoulders. Additional options in your situation may include bankruptcy, downsizing, reverse mortgages or debt consolidation.

Of course, each path has its pros and cons. This guide covers various methods of getting help with debt and who can help with each approach.

Expert Quotes on Seniors Getting Help with Debt

Expert Quotes on Seniors Getting Help with Debt

What Types of Debt Do Seniors Carry?

Seniors shoulder various types of debt, even student loans. These loans may be from their own education or from helping to finance their children or grandchildren's education. Here's a look at the common types of debt that seniors carry:

Mortgage Loans
Student Loan Debt
Credit Card Bills
Car Loans
Medical Expenses

Some of this debt is secured, while other types are unsecured. Secured debt is tied to a piece of collateral/property such as a home or car. For example, if you stop paying your mortgage loan, you could lose your home (secured debt). If you stop paying your credit card or your medical bill (unsecured debt), you don't lose any corresponding property. Unsecured debt means more risk for lenders and typically comes with higher interest rates.

Some Basic Approaches with Each Type of Debt

Mortgage Loans

It’s possible for some seniors to sell their home and get a smaller one (downsizing). They may be able to completely eliminate mortgage debt this way. Bankruptcy may be necessary and is discussed in more depth later in the guide. Refinancing may be an option, and another is to contact the lender and discuss programs the lender has that may help. If seniors have a family member needing a place to live, then renting out a room could be helpful. It also means more company in the house. A reverse mortgage generally isn’t an option here, as you must own your home outright or have a small balance. If your balance is that small, it’s usually best to explore avenues other than a reverse mortgage.

Student loan debt

Seniors may be able to get their payments lowered if the debt is federal or PLUS. Try options such as an income-based repayment plan or a discharge. Deferment, forbearance or consolidation may be possible. Student loans generally do not get discharged in bankruptcy, but there are enough exceptions that it’s worth asking your lawyer about (more on lawyers later).

Credit card bills

Bankruptcy may make sense if your credit card bills are high enough and especially if you’re dealing with other types of unsecured debt. Your family members may be able to help with budgeting and dealing with creditors who keep calling. Other avenues to consider may include debt consolidation or a bookkeeper to track your finances.

Car loans

Bankruptcy can lead to your car loan being discharged, but you give up the car. That’s not necessarily a bad thing if you no longer want to keep driving. Bankruptcy can also discharge other types of debt, freeing up enough money to reaffirm a car loan and keep your car. Another option is to contact your lender as soon as possible and work out a repayment plan.

Medical expenses

This is a huge, tough issue for many seniors because their medical expenses keep going up with no end in sight. While many hospitals do have financial assistance programs, seniors often need much more than that. Bankruptcy can discharge medical expenses, but if you’ve incurred them in the past and have the same health issues, these bills are likely to keep coming. That’s a problem when you’re still on a fixed income without the means to pay down medical expenses. One recommendation is to explore community resources. Staffers may be able to help you sign up for government benefits and programs and obtain prescriptions. Try this services locator link for help with medical expenses and other types of bills.

Now, let's look at specific avenues such as bankruptcy. What are the advantages and disadvantages, and who do you turn to for help getting started?

Bankruptcy

Filing for bankruptcy has helped many seniors clear most or all of their debt-and they go in with a lot. In fact, the median net worth of a senior who files for bankruptcy is negative $17,390, according to the research paper, "Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society."

Bankruptcy can discharge such debt as credit card bills and medical debt while leaving retirement accounts intact. However, if you own your home and have built significant equity, some of that equity may have to be used to pay creditors in a bankruptcy filing.

Meeting with Lawyers

Each financial situation is unique, and it's possible that bankruptcy isn't a good or viable solution in your case. Alternatively, it could be an excellent approach. To find out more about what's possible in your situation, meet with multiple bankruptcy attorneys (preferably at least three). Many offer free consultations. To maximize that time, bring the following:

Income tax returns
For the past two years
Proof of income
(includes retirement accounts, Social Security payments and self-employment income)
List of assets with the ones you particularly want to keep highlighted
(may include house, car, stocks, jewerly, and retirement accounts)
Any summons or notifications of being sued
List of expenses
(It may include food, rent, utilities, insurance premiums, chartible payments and ongoing debt payments)
List of debt
(their amounts, how long payment terms are and the name of each creditor. Include medical, mortgage, credit card and student loan debt, amount other types)

In addition, check each lawyer's website. There could be other information that the lawyers recommend you bring. If you don't have all of the information above, that's OK. It's a lot of information, and it's easy to feel overwhelmed. Bring what you can find.

To find legal help, you can do an online search for bankruptcy lawyers in your area. The phone book is also an option, and you can ask friends or loved ones if they can help find lawyers or set up appointments. This American Bar Association link may help you find free legal assistance, and community programs should have resources as well.

It is technically possible to do a bankruptcy filing on your own, but it is strongly discouraged. You know what? Just don't do it! Yes, attorneys' fees may seem high, especially since you're struggling with debt already. However, doing a filing incorrectly can cost you much more in the long run. For example, if you mistakenly leave an asset off your filing, the entire case could be dismissed, and you've already paid filing fees. Plus, bankruptcy may not even be appropriate in your case.

Expect to pay anywhere from $500 to $1,200 for your bankruptcy filing. Filing fees, type of bankruptcy and the complexity of your case affect how much your lawyer might charge you. Chapter 13 bankruptcies tend to cost more. Your rate will probably be charged as a flat fee, with the lawyers working about 10 hours on your petition. Check that a flat fee is the case so you won't be surprised later with hourly charges. Also, find out the fee upfront! Ask about whether payment is expected in full before work starts or whether a partial payment is required upfront. In general, you pay less with lawyers who work alone versus those who work in larger firms.

Some people who would rather not get a bankruptcy lawyer instead seek out the services of non-attorney petition preparers. Don't go down this route, either. These preparers aren't supposed to offer legal advice. Their task is simply to enter information into forms. If you get offers from such preparers, especially if they claim to help with legal advice, ignore them.

The Two Types of Bankruptcy

The two types of personal bankruptcy are Chapter 7 and Chapter 13. Most senior citizens who file bankruptcy file Chapter 7.

  • Unsecured debt such as credit card bills and medical bills are discharged.
  • You can also give up secured debt such as mortgage loans and car loans, but you have to give up the house or car as well.
  • If you want to keep the property, you re-affirm these particular debts and continue to pay these creditors.
  • Your payments must be current for you to keep the property.
  • Some debt that can’t be discharged generally include student loan payments, child support obligations and certain types of tax debt.

To file Chapter 7, your income must be under the median income for your state and household size. One piece of good news is that Social Security income isn't counted as income.

The median income numbers are adjusted every six months. This link takes you to the figures for bankruptcy cases filed between November 1, 2018, and March 31, 2019. In New York state, the median income is $69,642 for a two-person household.

  • You repay at least part of your debt in three to five years.
  • People filing Chapter 13 tend to have high incomes and sizable assets.

Debt that typically does not get discharged in bankruptcy includes child support obligations, alimony, student loans, tax debt, and fines and debt you owe for breaking the law. Always check with your bankruptcy attorney about which debt you owe that can and cannot be discharged.

Debt such as retirement plan loans, HOA fees, court fees and divorce/settlement agreement obligations may or may not be dischargeable, depending on state law and whether you file Chapter 7 or Chapter 13.

Bankruptcy might not make sense for you in two general situations:

when you have too many assets or when you own nothing a creditor would take. Let's look at each scenario.

In a Chapter 7 bankruptcy, creditors might take assets you want to keep. In a Chapter 13, the debt repayment plan could be quite high—although you could keep your assets.

Creditors generally cannot take your retirement accounts, Social Security money, household goods and inexpensive car. They’re among a list of “judgment-proof” items. If these types of items are all you have, there’s probably no long-term reason to file for bankruptcy. In the short term, these stressful creditor calls should stop when you file. Still, filing for bankruptcy when you are judgment-proof is not a good idea and can incur unnecessary fees. Here is a FAQ on whether collectors are contacting you legally and what you can do to get them to stop. The main thing is to send them a letter via postal mail telling them to halt contact. Here is a template.

Not Paying Debt

Speaking of collectors, sometimes the only thing you're able to do with debt is not pay it. Bankruptcy might not be a good option, and alternatives such as downsizing or reverse mortgages may not be feasible in the least bit.

In cases when you have debt and just no way of paying it, collectors could be your biggest issue. They're supposed to abide by regulations and accurately represent what you owe. Many run afoul of what they are allowed to do. For example, they may harass you and threaten to have you arrested. Here are the avenues open to you:

Speak with a lawyer if the behavior is especially egregious. You could have grounds for a potentially fruitful lawsuit. Plus, there may be a class action lawsuit going on that you could participate in.
Report the collector to your state attorney’s general office.
Submit a complaint with the Consumer Federal Protection Bureau.
Develop a script (either by yourself or with family/friends) to have ready at any time when a collector calls. This way, you’re never caught off guard and can have multiple responses for different scenarios.

Downsizing

Downsizing can be another way to get help with some of your debt. Say you own your home fully, it is more space than you need and you can get a good price for it. You could use proceeds from a home sale to buy a smaller home at a lower price. Spend some of the remaining money to pay off debt.

As a general rule of thumb, it may be time to downsize if you're paying more than 33 percent of your income to housing costs. Similarly, if you simply have little money left over after paying housing expenses, it could be time to think smaller.

Of course, there are other considerations. If downsizing brings you closer to family, health care facilities and bus/subway routes, that's great. If it means moving away from any of these, the tradeoff may not be worth it.

Downsizing can bring other advantages other than cost savings and proximity to medical care and family. For example, you can pick a community where you don't have to do snow removal yourself. No matter what, the process of downsizing can be exciting, sad and overwhelming. The following folks can help.

Real estate agent(s):
Agents help sell your home and help you purchase another. Choose your agent carefully, Ask candidates about their experiences helping folks buy a home while selling their current one.
Children and relatives
Hopefully, your kids will be a source of help. Of course, children are sometimes attached to the house they grew up in, and regardless of their attachment, may want to keep some items from the house. Loved ones can also help with yard sales and selling collections online for extra cash.
Stores that accept donated goods:
You may want to donate your furniture and other items to places such as Goodwill instead of leaving them at the curb.

Keep these tips in mind as you downsize.

Avoid stairs in your new home. Look for a single-level place.

Throw out items such as old paperwork and broken lamps.

Keep only one set of items such as dishes and silverware.

Reverse Mortgage

A reverse mortgage may be helpful if you are "house rich, cash poor." However, beware of these mortgages, and evaluate your options carefully. For example, it may be better to downsize even if you really don't want to. Another alternative to a reverse mortgage is taking out a home equity line of credit.

Here's the rundown on reverse mortgages:

They are for homeowners 62 and older.
You can borrow 58 percent of your home’s equity.
The application process typically takes 30 to 45 days.
You can cancel the application at any time during the process.
You have a three-day period after the application is signed to change your mind without penalty.
You must undergo phone or in-person counseling required by Housing and Urban Development.
You must own your home outright or have a small balance.
You must live in your home.
Federally backed reverse mortgages are called Home Equity Conversion Mortgages.
You must have the financial resources to continue to pay for property maintenance, taxes, insurance and other ongoing property charges.
The loan size cannot exceed the home’s market value.
Factors going into the loan size include your age, current interest rate and amount of equity you have.
The older you are and the more valuable your home, the more you can usually borrow.
After your death, the lender sells the home to cover the loan. Any leftover money goes to your estate/heirs.
  • The loan can be a lump sum, fixed monthly payment, line of credit or a mix.
  • You don’t make monthly payments.
  • Lenders collect only when you move, sell or die.
  • Your heirs can keep the home if they pay off the mortgage.
  • Reverse mortgages are most beneficial when you take them out earlier rather than later, allowing your other investments to grow without needing to touch them.
  • You can use the money to buy a primary residence.
  • Homeowners pay a 2 percent upfront premium of the loan amount.
  • Homeowners also pay annual mortgage insurance premiums of 0.5 percent.
  • Reverse mortgages are generally not a good way to preserve family wealth.
  • There is a $10,000 cap on property tax deductions for the IRS.
  • Reverse mortgage foreclosures are possible for reasons such as falling behind on property taxes and home insurance.
  • Some lenders may incorrectly or too aggressively attempt to foreclose.
  • Scams are common.

Follow these tips from the FBI to minimize your chances of being scammed:

Initiate the process yourself—find your own mortgage counselor, for example, and do not reply to unsolicited ads.
Sign paperwork only if you completely understand it.
Approach claims such as, "Own a home with no down payment!"" with caution.
Avoid accepting money from anyone for a house you did not buy.
Use the links on this page from HUD to find solid lenders and counselors.

Estate Planing with Debt

Many people die owing some kind of debt. The debt could be as simple as a couple of utility bills from the prior month. In many cases, it's more complicated than that, and you probably prefer not to leave a thorny mess for your heirs to deal with. They'll appreciate the gesture, even if all you can do is outline your debt-how much you owe and to whom. No one likes surprises such as unpaid credit card bills, gambling debt and home equity loans.

A good way to get assistance with your debt for estate planning purposes is to enlist the help of a lawyer. Swindling does happen, so follow these tips to avoid scams.

Lawyer's assistance or not, estate planning when you have debt is not fun. However, you may be pleasantly surprised to find that some of your money will be protected. For example, your 401(k) plan with a named beneficiary and your jointly held property should be protected.

If your spouse dies, creditors may come after you to pay bills. You might not be legally obligated to pay some-or all. A lawyer can help clarify the laws in your state and where your responsibilities lie.

Managing Debt and Avoiding Further Debt

Getting into debt can lead to a vicious cycle, with debt leading to more debt. For instance, if you use a credit card to pay a medical bill and cannot pay the card balance in full, you owe more than you did originally due to interest. Similarly, if you have enough money to pay only one bill and you pay rent instead of a car repair, the car gets into even worse shape. When there's no choice but to fix it, the repairs may be much more expensive than they would've been just a few months ago.

It is rarely easy to escape such cycles. Some people do it through bankruptcy (this guide has a section on that above). Others may try a method such as debt consolidation.

Debt consolidation can lead to lower monthly payments but more unsecured debt overall (a longer payment period). One advantage is that all of your unsecured debt should be in one place. You pay one party a month instead of many. You can do debt consolidation on a credit card, through a personal loan or home equity loan, or a debt management plan. Do be aware that it is risky to transfer unsecured debt into a secured, home equity loan (you could lose your home when you wouldn't have before).

A debt consolidation approach may not make sense for most seniors because they need a good debt-to-income ratio. Many seniors don't have enough income coming in. Debt consolidation also doesn't make sense if your debt balance is too large or too small, if you have poor credit or if you have poor money habits.

Options other than debt consolidation may include debt settlement, credit counseling and debt management.

One method of debt settlement is when you contact creditors or collectors on your own to try to negotiate a settlement. Generally, you agree to pay a smaller balance than what you owe. Creditors agree to this because getting something is better than getting nothing. There are also companies that do debt settlement for you. Approach them yourself. Companies that try to solicit your services could be scammers.

You might want to consider credit counseling. A counselor talks with you about how to manage expenses and debt, and you may feel less alone as you tackle your debt. Aim to find a nonprofit counselor and be sure you understand the fees and services offered.

With a debt management or debt relief company, the company receives debt payments from you. Most of that money is used to repay your debt to the various creditors, and a small amount goes toward the company for administrative fees. If you go this route, choose your company carefully. Scams abound!

What about not incurring further debt? That may be impossible for seniors, many of whom need medical treatment. Some tips:

Avoid signing any on-the-spot loans that hospitals try to push on you.

Try to get a zero-interest payment plan from the hospital billing office.

Consider treatment at a nonprofit hospital, which is required to help low- income patients with financial assistance (some for-profits do this too).

Talking with Your Children about Your Debt

Your children could be your most valuable resource when you seek help with your debt. Of course, you're not excited at the prospect of telling them you have debt. That's normal. You've taken care of your children since they were young, and even in their adulthood, you might have helped them out financially. They see you as stable and strong. If the debt was incurred on their behalf (loans for their college, for example), you don't want to cause them to feel guilty.

However, your children could act as a middleman or second set of ears/eyes between you and other parties such as collectors and lawyers. They can also help you find community resources and break down complicated language and concepts.

Stay matter-of-fact for the discussion if possible. Beforehand, prepare a list of your debt-their amounts, who you owe, how long you have been paying, the interest rates and how much is left to pay. If creditor harassment is a problem, keep a record of company names, the names of the people contacting you, when they've made contact and the comments they have made. Also, draw up a list of your income, expenses and assets-anything to help you and your kids get as full a picture as possible.

It's OK if you get emotional, but having this paperwork to refer to during the discussion may keep it on an even keel. It gives both you and your children factual information to refer to. You'll get to be in control of the discussion instead of feeling stuck with a vague sense of, "I'm in a lot of debt. Not sure how much."

If you'd rather not bring this issue to your children, that's OK too. Friends and other relatives such as siblings, nieces and nephews may be able to pitch in. Look for personal finance counselors or debt counselors in your community. Also, remember that many bankruptcy lawyers do free consultations.

Getting Help with Debt as a Senior

Many senior citizens live on fixed incomes, and debt hits them extra hard. Even seniors who work or who have socked away nice amounts of money for retirement often find themselves struggling with debt.

What makes the situation worse is that scammers see seniors as easy prey. Shady characters get in touch and promise to eliminate seniors' debt. What really happens is that they take seniors' money, putting these folks even more into the hole. Not cool.

The good news is that legitimate avenues exist to help seniors with their debt. The options in your situation may include bankruptcy, downsizing, reverse mortgages or debt consolidation. Sometimes, all you can do is empower yourself with information and fend off the collectors. That's OK, too.

Additional Resources

  • How to Deal with Debt Collectors: Don't ignore them, and watch for scams
  • AARP Money: Get tips on debt management, credit, mortgages, retirement and much more.
  • Your Guide to Reverse Mortgages: Find a certified professional, learn more about how reverse mortgages work, and calculate how much money one could bring you.
  • Eldercare Locator: Find services for help with issues such as insurance, benefits and housing for seniors and their families.
  • Help with Debt Issues: Search a compilation of resources for help with debt in general and assistance with retirement planning, loans, insurance, budgeting and much more.