If You Are Near Retirement is Bankruptcy Wise?

There are a lot of older people facing very real debt problems and at the same time thinking about retirement. This poses a very big problem. How are you supposed to retire AND repay your debts?

While it's not thought of as a "financial strategy", bankruptcy actually offers a very powerful tool for future retirees to get rid of their debt and start retirement with a clean slate.
Bankruptcy Can Be a Powerful Solution for Retirees
There are a couple reasons for me to say this. First, as we get older we tend to use far less credit. This means the effect of a bankruptcy on a credit report is less of a concern. Second, the likelihood of repaying debts once your income is reduced is very small. Third, if you have significant assets to protect AND large debts, then a chapter 13 plan can seriously reduce monthly payments and protect all of your property. Let's discuss each point in detail.

Impact on Your Credit
Without a doubt, the single most obvious drawback to bankruptcy is the effect on your credit score. It's a real issue that makes bankruptcy a solution that only those in real need of help use. Once a bankruptcy has been completed, the record of it will remain on your credit report for up to ten years. This doesn't mean your credit is going to be ruined, but it will be affected, dramatically at first, then less so as time passes.

For older Americans who are retiring, making large purchases on credit may not be an important consideration anymore, so having to deal with higher interest rates is not a significant issue.

Repaying Debts on a Fixed Income
Normally, once we retire we will have some type of fixed income (whether it's a pension plan, retirement benefits or social security) that is generally less than income from previous employment. This makes repaying old debt much more difficult. It is often financially beneficial to file for bankruptcy on the old debt and make living on the smaller fixed income much easier.

Chapter 13 Payment Plan
Often at retirement, you may have a lot of equity in real estate, or multiple cars, boats, an RV or a vacation home. Obviously you want to protect this property, not only from a chapter 7 bankruptcy, but also from creditors who may place a lien on it.

Filing for chapter 13 involves putting together a payment plan into which the petitioner makes monthly payment to the bankruptcy trustee. The trustee then disburses funds to the creditors accordingly.

The important part of a chapter 13 bankruptcy is the way the plan is created. It has much less to do with the amount of money owed, and much more to do with the available monthly income of the petitioner.

For someone on a fixed income, like social security or other retirement benefits, the plan would only involve a payment up to the net disposable monthly income available. That is, the amount of money left over each month after rent/mortgage, utilities, travel, entertainment, food, clothing, etc. Often, this number is far less than what would be required to pay off the debt over three to five years (The length of a typical chapter 13 plan). This means that debts are repaid at anywhere from 5-50% of what is owed.

Being able to discharge 50-95% of your debt while protecting all of your property and assets is a very valuable option for people in this time in life.

The Bottom Line
As I stated earlier, bankruptcy is rarely thought of as a "financial strategy", but when you look at the numbers, there is nothing else available that is as powerful for reliving debt and protecting assets than a bankruptcy.