Bankruptcy Can Help Seniors Protect Assets

By CONSTANCE GUSTKEMAY 13, 2015. After work started to dry up and creditors began calling, George Maxey, 66, a retired nursery owner and plant consultant in Orlando, Fla., wanted his financial peace and quiet back. With his income dwindling, though, Mr. Maxey saw that the debt hole he was digging was only getting deeper, with no end in sight. So he declared Chapter 7 bankruptcy, which liquidates some assets to repay creditors.

Bankruptcy was a chance to hit the financial reset button, he said. “I wanted to leave money, not debt, to my grandchildren,” he said, “and begin rebuilding my life.”

Getting over the stigma of bankruptcy was the hardest part, Mr. Maxey added.

For some older Americans, bankruptcy can bring much-needed relief from debt brought on by medical expenses or helping needy children, and experts say it can be a valuable tool to protect retirement assets, after negotiating with creditors. But with reliable statistics on current bankruptcies hard to come by, anecdotal evidence suggests that shame at being in financial turmoil frequently prevents retirees from getting help early.

“People usually postpone bankruptcy for several years before filing,” said Deborah Thorne, an associate professor of sociology at Ohio University, who has studied older Americans and bankruptcy. “When finances head south, they should file right away.”

By spending retirement assets, Ms. Thorne said, retirees risk a downward financial spiral from which they are less likely to recover than younger people. A better strategy is to defend assets at all costs, she said.

Why? Retirement income and savings are usually untouchable during bankruptcies under federal law. Pensions, 401(k)’s and qualified profit-sharing plans are exempt from creditors, as are individual retirement accounts worth up to $1.245 million. Social Security payments are also exempt.

Retirees can usually avoid losing their homes by using a homestead exemption, intended to protect the equity of a principal residence in a bankruptcy. (Equity is the value of a property minus the amount owed on it.) Homestead exemption amounts vary by state, but some states, including Florida and Texas, do not limit the equity that is exempt. “This is a way to keep your estate intact,” said Eric Klein, a bankruptcy lawyer in Boca Raton, Fla.

Some debts like student loans and federal tax bills less than three years old usually cannot be discharged in a bankruptcy, said Walter Benenati, a bankruptcy lawyer in Orlando, Fla. The same goes for alimony and child support. So bankruptcy may not wipe the slate clean.

A means test helps determine which type of bankruptcy fits best. Chapter 7 usually works best for people without a lot of income or assets, specialists said, because they are usually used to satisfy creditors. High-income filers usually opt for Chapter 13, which is a repayment plan. “It lasts for a minimum of five years, and it’s a budget that’s created to pay back creditors.” said John Pottow, a professor at the University of Michigan Law School and a bankruptcy specialist.

But before going into a bankruptcy, try negotiating with creditors, said Johanna Sweaney Salt, a certified public accountant with Gray, Salt and Associates in Claremont, Calif. One place to start is credit card companies, by asking for reduced interest on outstanding balances. Even medical debt can be negotiated, she added. “In many cases, hospitals have even cut balances in half,” she said.

“A lot of people who jump into bankruptcy never know what settlement they could have had,” said Paul Kuzmickas, a bankruptcy lawyer with Luftman, Heck & Associates in Cleveland. “So it’s always better to negotiate first.” Retirees have leverage here because creditors know they cannot touch retirement money, he added.

Simply refusing to pay is another strategy. Retirement assets are off the table, and the retiree may have little else. Yes, creditors can take the retiree to court, and even get a judgment, but the money may be uncollectable. This is called being judgment-proof, Mr. Kuzmickas said.

Either way, credit scores do take a beating. A bankruptcy can stay on a credit report for as long as 10 years. But negative credit scores from mounting debt can be equally corrosive, specialists said.

After Mr. Maxey declared bankruptcy, his credit score dipped 200 points. “Now it’s slowly coming back,” he said. He is also working on rebuilding his credit by leasing a car.

People who declare bankruptcy must also take credit and debtor counseling classes that help them rebuild their finances.

“I’m so conservative now,” he said, “and careful with everything I do.”

Source: http://www.nytimes.com/2015/05/14/business/retirementspecial/bankruptcy-can-help-seniors-protect-assets.html?emc=edit_my_20150803&nl=your-money&nlid=32663937