As the Baby-Boomer generation starts to reach retirement age, more and more retirees have to face their long awaited freedom from the daily grind with mountains of debt.
While traditional means of settling one’s debt, consolidation, negotiation, and bankruptcy are available, these may not be the best solution for an individual on a fixed income.
Debt consolidation is the process of taking out a loan to pay off your high interest loans and debts and paying back the loan at a lower interest rate. However, even with the increasing life expectancy of the average American, few lenders are willing to make loans that the borrowers on a fixed income with lots of medical bills can repay.
Debt negotiation can also be a risk for creditors, and for the same reasons. In debt negotiation, the debtor (or a company on their behalf) negotiates with the creditor to reduce the amount they owe. But because a lot of the money retirees owe are for medical bills and hospitals are notorious for over-charging and their reluctance to accept less than what they’re owed, negotiation can be tricky. However, a retiree has two advantages based on their age, creditors know that they’re on fixed incomes and that ill health could mean the creditor might not get all of their money if the debtor dies. Therefore, this means that creditors have an incentive to agree to what they can get as soon as possible.
The best thing a retiree can do while living on a pension or social security is to budget wisely. Try and minimize your debts to what you can afford, and save as much as possible. And just like with younger debtors, it’s better for retirees to stay away from credit cards as much as possible. If you use credit cards, then making more than the minimum payments is always advisable.
The last alternative for any debtor is bankruptcy. Most consumer debtors file for Chapter 7 or Chapter 13 under Title 11 of the Federal Code. Chapter 13 is designed to help individuals with income pay off their debt over five years, which is not an option for most retirees given that most retired debtors have to live on social security and/or government pensions. Chapter 7 gets rid of most of your debt by liquidating certain assets and using the money from the sale to pay off your debts according to your state’s priority laws. In order to file for Chapter 7, the Federal government requires that the debtor make less than the median income for their state, which is not a problem for those retirees living on social security and/or government pensions.
If you are facing Chapter 7 bankruptcy and are afraid you’ll be left without a means of support, do not worry. Most states in the US have purposefully enacted exemption laws designed to protect most retirement assets from being touched by a creditor or the bankruptcy estate. These exemptions also cover judgments for collection suits, rendering most retirees judgment proof. The problem, however, is if a debtor is judgment proof the chances of their bankruptcy being approved, whether Chapter 7 or 13, is lessened.
Finally, there is one option available to retiree that is not available to regular debtors, the reverse mortgage. Reverse mortgages are a lot like second mortgages in that you are borrowing against the equity in your home in order to get money. These loans are safer than the average second mortgage, because they are non-recourse loans, meaning you will never owe more than what your home is worth, even if you borrow more than what your home is worth. And since you can never be forced out of your home with a reverse mortgage, you are safe from foreclosure.
Unlike a regular mortgage, a reverse mortgage does not require monthly payments; in fact a reverse mortgage does not have to be paid at all until the home is no longer used as the primary residence. In addition, unlike traditional mortgages, a reverse mortgage does not need a credit check. A reverse mortgage does not have any income restrictions at all, and is tax-free.
However, there are several restrictions. A person applying for a reverse mortgage must be 62 years of age, own their home outright or have a low mortgage balance, and receive credit counseling before you qualify. Also, if you are planning to leave your home to your potential heirs after you die, you must pay back the reverse mortgage before you die otherwise the home will be sold to pay off your loan and the difference paid to your estate.
Therefore, if you are retired and have a lot of debt there are always ways out. The important thing is to manage your money wisely, and keep away from dangerous debts like payday loans. Know your rights, and if you have any problems consult a lawyer who can help you fight for your hard earned leisure!