Filing for Bankruptcy in Retirement—A Good Thing?

The number of people filing for bankruptcy protection in retirement has soared in recent years — even before the recession.

In fact, people 65 and older are the fastest-growing segment of the population seeking bankruptcy protection, according to a recent study from the University of Michigan Law School.

The problem is simple math, said Johanna Sweaney Salt, a CPA with Kaufman, Schmid, Gray & Salt in Claremont, Calif. Their medical expenses, taxes and other costs keep going up, while their income is going down. Social Security hasn’t had a cost-of-living adjustment in a long time and pensions and retirement accounts took a huge hit during the recession. Reverse mortgages and other alternatives presented to them as “solutions” often just dig them further in the hole.

“Most people think ‘Oh, I have Medicare — I’m covered,’” said Jean Setzfand, director of financial security at the AARP. “But in fact, there are quite a lot of out-of-pocket expenses — and those continue to rise.” The biggest one, she said, is long-term care costs. Plus, a lot more people are going into retirement carrying a mortgage.

“If your medical expenses haven’t gone down and your only source of income goes down by $200, $300, $400 or $500 a month — the well runs dry,” Salt said. “Your alternatives are to get into debt or borrow from relatives — and many seniors are proud and don’t want their families to know the kind of mess they’re in,” she said.

The result is that they start living off of their credit cards and suffering the harassment of creditors and debt collectors. Elder Americans carry 50 percent more credit-card debt than their younger counterparts, the Michigan survey showed.

For many, bankruptcy carries a stigma of personal failure and shame. But sometimes, Salt said, it’s their only option — and not necessarily a bad one.

“A tremendous burden is lifted from their shoulders and it isn’t as awful as many expect,” she said.

Not only will it alleviate nagging thoughts about debt that can ruin what are supposed to be your “Golden Years” but filing a bankruptcy case can “stop the constant drain on their limited income that is going to creditors,” said Theodore Connolly, a bankruptcy lawyer and co-author of the book “Road Out of Debt: Bankruptcy and Other Solutions to Your Financial Problems.”

“Every dollar they don’t pay to creditors is one more dollar they can use for their everyday expenses,” he said.