Important Legal Topics Pertinent to Senior Adult Bankruptcies
For those senior adults with unmanageable debt and few assets, filing for bankruptcy may be a viable option to reduce those overwhelming financial concerns. Bankruptcy is a legal process wherein debt is discharged or managed through court order when a qualified senior is unable to repay debts. In summary, bankruptcy is a life preserver for those drowning in debt and not an anchor that one must carry to the bottom of the sea.
Chapter 7 bankruptcy and Chapter 13 bankruptcy are the two main types of personal bankruptcy, with Chapter 7 being the one most commonly filed. Most debtors choose Chapter 7 because it is referred to as “liquidation bankruptcy,” which means the court will liquidate (sell) non-essential assets owned by the debtor and satisfy (pay off) as much of the debt as possible with the assets available for sale. The law does not cause the sale of all assets. Instead, a debtor’s assets that are necessary for daily living are considered exempt or abandoned. Exempt assets include items like a vehicle, clothing, tools, or equipment necessary to work, and sometimes a primary residence if the debtor is willing to enter into a reaffirmation agreement (a new agreement to continue paying the lender and retain the property subject to that lien).
While Chapter 7 is the most common filing, Chapter 13 is the most complex because it is a reorganization of debt and is similar to creating a debt consolidation plan. A Chapter 13 bankruptcy is also called a wage earner’s plan because it enables seniors with regular income to develop a plan to repay all or part of their debts. Under Chapter 13, debtors propose a repayment plan to the court to make installment payments to creditors over three to five years. In that plan’s natural period, assets are protected from foreclosure and repossession as long as the senior performs all terms of the plan diligently. While the specific processes involved with each of the two bankruptcy types are distinctly different, they both are intended to achieve a similar result; debt relief for senior individuals.
What factors are present when a senior citizen should consider bankruptcy? If some or all of these are true: (a) help is needed to eliminate debt that the senior’s heirs could otherwise inherit; (b) if the debt is overwhelming the senior’s disposable money and affecting his or her daily activities; (c) if medical debt is high and climbing; (d) if the senior has high consumer debt (normally credit cards) and repaying that debt is causing concerns; and (e) if a spouse has died leaving the senior without sufficient income to address mounting debts; and (f) if a divorce or legal separation has caused unmanageable financial concerns. If some or all of those are true, next consider the following: (a) are the existing assets so essential that they are necessary for daily living?; (b) are the existing assets too valuable to lose?; (c) is the debt the type that can be discharged (erased) in Chapter 7?; (d) would Chapter 13 help the senior catch up on past due accounts; and (e) can the senior adult pass the means test to qualify for a Chapter 7 bankruptcy (their income is below the median income for the state they where they live).
Once a senior adult has decided to file, they must understand going through Chapter 7 bankruptcies work best for those who do not own their primary residence or do not have significant equity in a home because those who own a house outright may be declined since they have enough money to pay creditors. Those who have significant equity in their home could be forced to use the equity in their home to pay creditors, or they may be forced to sell the home altogether.
The types of debt that can potentially be discharged in a senior adult’s bankruptcy include: (a) home mortgages – if the senior adult does not wish to surrender his or her home to satisfy debts, under certain circumstances, he or she may claim it as property exempt from being surrendered, or if equity is minimal, he or she may enter into a reaffirmation agreement to pay off the mortgage according to new terms. In either scenario, bankruptcy should provide a method of foreclosure defense; and (b) vehicle loans – similar to a primary residence, the senior may choose to surrender the vehicle to satisfy any lien or try to enter into a reaffirmation agreement to pay off the debt over time while keeping the asset. Again, a primary vehicle may be claimed by the senior adult as an exemption in order to avoid forced foreclosure or surrender; and (c) consumer debt (credit cards), medical bills, and utilities – each of these is considered unsecured debt or the type of debt without collateralized assets that can be surrendered or returned to satisfy the debt; and (d) student loans – while it is unlikely a senior adult would have this debt, it is even more unlikely and extremely difficult to discharge this type of debt in a bankruptcy.
Most seniors have accumulated several assets that will not be protected from creditors in a Chapter 7 bankruptcy or those same assets may substantially increase their required payment installments in a court-approved Chapter 13 bankruptcy plan. In the alternative, some senior adults have little property to protect from creditors so they are therefore judgment proof, making bankruptcy unnecessary. As a result, senior adults should discuss the following with a bankruptcy attorney before filing: (a) how much of their debt can be discharged by the court; (b) how much of their property can be claimed as exempt and protected from creditors; and (c) whether they owe debts attached to a home or car that could be subject to reaffirmation agreements.
But not all senior adult bankruptcies are complicated and there may be some advantages to filing later in life. Creditors are normally precluded from taking Social Security benefits. If the senior adult depends almost entirely on Social Security benefits, they can be assured that creditors cannot collect from those benefits. The senior adult would keep the benefits during bankruptcy if they were held in a separate account, all the while disclosing the income as part of the filing process.
Senior adults considering bankruptcy should always consult with an experienced bankruptcy attorney. One with several years of experience who files bankruptcies consistently. One who deals specifically with bankruptcy and a few other topics as they are normally well versed in the ever-changing laws of bankruptcy. Make no mistake, bankruptcy law can be complicated and if mistakes occur during filing, the court may dismiss the debtor’s petition altogether costing the senior adult several hundred dollars in filing fees and costs.
The cost of bankruptcy will include court costs (filing fees), and attorney’s fees. Hiring a bankruptcy attorney is definitely worth the investment. Filing fees for Chapter 7 are $338 and $313 for Chapter 13. Attorney’s fees for Chapter 7 average between $1,000 and $3,500, and for Chapter 13 between $2,500 and $6,000. As with any legal case, the more complicated the topic, the more time the attorney must spend in the matter.
In summary, bankruptcy is a useful way for seniors to discharge or manage overwhelming debt and reduce the stress caused by collections efforts. While senior adults are filing bankruptcy at an ever-increasing rate, it may not be a good strategy for all of them. Some may have too many assets, too few assets, or their income streams may be scattered with tax and bankruptcy exemption issues. Some who file put property they have acquired or inherited over the course of their lives at risk, particularly if they elect a Chapter 7. While Chapter 13 is an alternative solution, seniors who choose that option may face remarkably high monthly payments under their repayment plan. At the other end of the spectrum are those seniors who have so few assets and income that they may be judgment proof; in other words, so poor or lacking sufficient assets and income that no reasonable creditor can collect. Those seniors normally do not need bankruptcy unless they are anxious about aggressive creditor tactics or they are concerned about a levy already filed against a bank account.
Todd Miller is a monthly contributor and regularly writes and speaks on various legal topics including bankruptcy, estate planning, probate, and elder law. He formed the Law Office of Todd Miller, LLC, 1305 Southwest Blvd., Ste. A, Jefferson City, Missouri in 2006. He has been awarded the Substantial Contributor Attorney Award by the Missouri Bar and ranked as one of the “Top Attorneys in Missouri” by The Legal Network. Mr. Miller earned his juris doctorate degree from the University of Missouri School of Law in 1999 and graduated with honors from Lincoln University in 1991. You may find him at www.toddmillerlaw.com (573) 634-2838 or on Facebook, Instagram, and Twitter.