Many senior citizens find themselves facing mortgage debt, home equity loans, and, of course, medical debt. In 2010, about half of seniors in the US had debt, and the average senior in the US owed $50,000. We hear a lot about student loan debt and the struggles of first-time homebuyers, but debt affects people of all ages. Seniors face unique issues related to debt, including how it will affect their heirs. Once you retire, it can be difficult to find a way to make those payments every month – a fixed income makes for a relatively tight budget. How can seniors deal with debt?
In California, senior citizens are protected from many collection actions. Retirement accounts are protected, for example, as are Social Security and other governmental benefits. If your creditors sue you for collection, they can’t touch any of those protected assets. In many cases, that means it won’t be worth filing a lawsuit against you at all because there’s nothing your creditors can collect. When most or all of your assets are protected from collection actions, you’re considered “judgment-proof.”
When you’re judgment-proof, you’re safe from debt collection. That means you may not need to file a bankruptcy to deal with your debts. However, bankruptcy may still be a good idea. You may not necessarily see any difference, but your heirs will.
What Happens To Your Debts When You Pass Away?
When you pass away, your debts don’t necessarily go with you. They typically aren’t passed down to your heirs, but they do still affect your estate. In many cases, after death, your estate (all the assets you leave behind) goes into “probate.” During that time, creditors have the opportunity to file claims for payment of your debts out of your estate. They’ll get paid before your heirs get anything. That may involve emptying out your bank accounts or selling your car, home, jewelry, or other personal property.
There’s an exemption for your home if you have a surviving spouse or minor heirs that live there and the probate court may set aside some assets to support your dependents, but other than that the creditors have the first shot at whatever you leave behind.
In general, your heirs won’t be liable for any debts left over after probate. However, your debts may be passed on to your heirs if you leave your assets to them in a revocable trust and the trustee doesn’t notify your creditors.
How Can Bankruptcy Help With Estate Planning?
For the same reasons that seniors often don’t have to file for bankruptcy, they’re uniquely positioned to benefit from it. Judgment proof debtors are often the ones that benefit most from bankruptcy. In California, the bankruptcy exemptions will protect most, if not all, of a senior’s property from creditors in bankruptcy. Retirement accounts, government benefits, and other assets, for example, are exempt and can’t be used to pay creditors.
Bankruptcy can can be particularly helpful to seniors because seniors are likely to accrue costly medical debt. Health care is expensive and we need more of it as we get older. Medical debt is an unsecured debt, meaning it’s completely wiped out in bankruptcy. At the end of the process, you’ll be left with no unsecured debt and you’ll still have all of your property to pass on to your heirs.
Some people worry about the effect of bankruptcy on your credit score. It’s true that bankruptcy will have a temporary negative impact on your score. However, unpaid debts are already lowering your score. In addition, seniors often already own homes and cars. You don’t need to worry about your score if you’re not going to be taking out any more loans.
Bankruptcy also has a couple of ancillary benefits for seniors. For example, it will put an end to collection calls. Even if you’re considered judgment-proof, your creditors may continue to contact and harass you in an attempt to get you to pay. These calls can be stressful and irritating, but bankruptcy will stop them. Bankruptcy can even be good for your health – debt is stressful and relieving that stress can have serious health benefits.
Is Bankruptcy The Right Choice For You?
The answer depends on your financial circumstances and estate planning needs. First, bankruptcy may not be a good choice for you if you’re struggling mostly with secured debt – bankruptcy won’t wipe that out. It may not be a good option if you have a lot of equity in your home. If you have too much equity in your home, you may have to surrender it in bankruptcy. You’ll need to work with your bankruptcy attorney to determine which of California’s 2 sets of exemptions can protect the property you need. You may also want to speak to an estate planning attorney about your estate and how best to manage it.
Other Options For Protecting Your Estate
You’ve worked hard and you want your property to go to your children and chosen heirs. Even if bankruptcy isn’t a good choice for you, you may want to speak to an experienced local bankruptcy and debt management attorney to learn about other ways to deal with your debt. You may be able to challenge the amount of debts or the debts may have passed beyond the statute of limitations, meaning they’re no longer collectible against you or your heirs. You may also be able to pursue debt consolidation or settlement in order to deal with it before you pass away.
We Can Help
If you’re a senior struggling with debt, we may be able to help. You may be judgment-proof, so your creditors won’t be able to collect from you during your life, but your estate is still vulnerable. Contact us today for a free case evaluation and consultation to learn about your options for protecting your estate from your creditors and protecting your heirs from your debts.