Most people see bankruptcy as a last resort. Typically, that strategy is a sound one. It’s usually best to try to work things out with moneylenders before choosing a more radical path.
But that’s not always the best approach. As we get older, our financial priorities change. Instead of accumulating more stuff, many of us focus on retaining the limited wealth we’ve obtained. So, it is important to point out that bankruptcy is a wealth-retention vehicle as well as a debt-relief vehicle.
Why Older Americans File Bankruptcy
Medical bills are the leading reason that people over 60 now make up almost one of ten bankruptcy filers in Minnesota. Unless you have a pricey Medicare supplement, this program only pays 80 percent of your medical bills. 20 percent of a long-term cancer treatment bill is an awful lot of money. Other smaller medical expenses add up quickly. After a few months, the nickel and dime co-pays and prescription drugs add up to quarters and dollars. Some people on fixed incomes have a hard time coming up with the extra cash.
Moneylenders are very aggressive when it comes to getting this extra cash. That’s especially true if the debtor is older than about 62. Debt collection, and not identity theft, repair scams, or anything else, is the most complained-of consumer service or product for people of this age group.
Most of these calls come from debt-buyers as opposed to the actual creditors. Medical debt is big business. Rather than alienate the patient with repeated calls that may do no good, doctors often sell this debt to third parties for a few cents on the dollar. With no doctor-patient relationship in the picture, debt-buyers care only about the money. In many cases, they are willing to bend the law to get it.
The Supreme Court recently made this process easier. It weakened some of the protections in the Fair Debt Collection Practices Act. If the issue comes up again, there is no telling what may come next, especially since President Trump may now replace a moderate with a conservative.
Bankruptcy discharges medical bills. Furthermore, because of the Automatic Stay, moneylenders cannot make any contact with debtors while the case is pending. So, many older Americans have an economic need that bankruptcy can address. What are some special issues in these cases?
Home Equity
If you have owned your own home for more than fifteen years or so, you probably have quite a bit of equity in that home. Some people hesitate to file Chapter 7 for this reason. Federal exemptions only protect $47,350 in equity for a married couple. However, that exemption may go a lot further than you expect.
Assume that the homeowner has $50,000 equity in a $100,000 home. On the surface, it appears that the bankruptcy judge could force this couple to sell their house to pay their debts. There seems to be $50,000 left after the owners receive their $50,000 in equity. But appearances can be deceiving.
According to the Bankruptcy Code, owners must declare the as-is cash value of a home on Schedule A. The cash value is usually a lot lower than the fair market value or tax appraisal value. For an as-is cash sale with no inspection, most home investors will pay about fifty cents on the dollar. Their first offer is usually a lot lower than that. But we’ll go with the 50 percent figure for the sake of argument.
The $100,000 house has an as-is cash value of $50,000. After the owners receive their exempt equity share, there would be at most $50 to distribute to creditors. It would not be in the best interest of the creditors to sell the house for a mere $50. That’s especially true since the creditors would bear all the sales costs involved, as well as the costs of any necessary repairs.
Retirement Account
In 2014, the Supreme Court reaffirmed that these accounts are 100 percent exempt. Creditors cannot touch any of the money in them under any circumstances.
That’s a significant plus for people who are nearing retirement. Unless you file bankruptcy, you may need to liquidate most or all of your IRA, 401(k), or other nest egg in order to pay medical bills. That’s a very unattractive option, to say the least. A bankruptcy filing, on the other hand, preserves all of your retirement account and eliminates all your medical bills. If you feel obliged to pay some or all of these expenses, we can certainly work out a payment arrangement with the doctor or debt-buyer.
People over 55 are filing bankruptcy in larger numbers than ever before. For a free consultation with an experienced bankruptcy attorney in Minnesota, contact Kain & Scott. Convenient payment plans are available.
