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Posted: June 30, 2008

Chasing the Old-Age Rainbow

Economy Forcing More Elderly into Bankruptcy

For many aging seniors, the hope of finding a carefree and financially secure retirement is disappearing faster than the proverbial rainbow. Statistics reveal the true extent of the problem: Americans age 65 and over are filing for bankruptcy at a faster rate than any other age group.

"There are multiple reasons for this shift. Rising costs across the board are the issue for the most part. Seniors are living on fixed incomes, they cannot keep pace or absorb all these increases," says R. Scott Bell, a bankruptcy law attorney in Bakersfield, California.

These facts help to outline the state of financial fragility facing many older Americans:

"I've been doing this work for close to 10 years and there's substantially more reliance on credit," says Al Solomon, director of the money management program for Cambridge-Somerville Elder Services in Massachusetts.

With rising costs, more and more seniors are turning to credit cards in the hopes of being able to cover their expenses with what they hope will be a short-term, financially manageable loan. But how does that expectation match up with reality?

To answer the question, let's run some numbers: Let's say that Mom or Dad has a $3,000 credit card debt at 21% interest and makes a payment of $60 a month. At that rate it will take about 41 years and $16,000 ($3,000 applied to the principal of the loan and $13,000 paid in interest) to become debt free. That’s a financial death sentence at any age.

How much credit card debt does the average senior carry? The answer depends where you turn for your information. In studies where seniors over 65 self-report their credit card debt, the answer is $4,000. But statistics compiled by the Federal Reserve tell a vastly different story: the average amount of revolving debt for all American households hovers around $12,000 -- a startling three times the amount of what seniors self-report.

Even seniors who have assets and own their homes face greater financial risk. Faced with a medical expense, the rising cost of utilities, a major home repair or life crisis, many tap into their savings, retirement fund or borrow against their home equity. The deeper they dig into their assets, the deeper the financial hole becomes.

"When you do a reverse mortgage or any kind of refinancing, you're taking the risk that you'll outlive your retirement," says Bell. "And you'll hasten that possibility if you turn to credit cards."

And it's not just debt that creates financial havoc. According to Sally Dubrow, a daily money manager in the Boston area, family caregivers should be on alert for signs of compulsive shopping, Internet or other forms of gambling, alcoholism, and even excessive charitable giving.

"I have one client who gave to 82 charities last year. Now he's on everyone's mailing list and he just keeps on giving. Like other people of his generation, he's a giver and he just keeps writing checks even though it's really getting less and less affordable for him to do so," says Dubrow.

If you suspect that your aging parent is struggling to make ends meet or over-spending or relying heavily on credit cards, providing help or getting help in handling an aging parent's finances may help avert a financial crisis or bankruptcy.

Services like the Money Management Program and Money Management Plus, both spearheaded by AARP, are sources of help.

The Money Management Program also helps low-income seniors who have a disability, poor vision, or who are experiencing some memory loss to manage their day-to-day finances. Clients retain total control over their finances. Trained volunteers provide confidential help with tasks such as budgeting, writing checks, and balancing checkbooks.

There’s also Money Management Plus, a free financial counseling service available to those who meet one of the following criteria: meeting income requirements, facing an immediate financial crisis (natural disaster or death of a family member or long-term illness, etc.), or facing bankruptcy.

Some families or individuals hire daily money managers like Sally Dubrow. Daily money managers help with setting up and adhering to a budget, making bank deposits, and ensuring timely payments, and they also can help negotiate re-payment terms with creditors.

Dubrow says, "It's absolutely necessary to develop a workable budget, even though it's very hard to do. Put everything down on paper and see what you can juggle."

To get a full picture of a loved one’s expenses, review their bank statements, credit card statements, cancelled checks, any savings or income funds, and gather up all bills. Obtaining a copy of their credit report may also be helpful.

"If you see Mom or Dad using a credit card to pay for food or their prescription co-pays, then there's a good chance your parent is going to end up filing for bankruptcy," says Bell.

In simple terms, bankruptcy is a legal process by which individuals can be relieved of their debt in order to "start over" with a fresh slate. Bankruptcy is one way to protect some assets, and it also allows for reorganization of one's finances. Some debts are erased from the record and forgiven. Other debts are considered non-dischargeable and a payment plan is undertaken.

While filing for bankruptcy may help to absolve some debt, it can be emotionally stressful, especially for older adults who are embarrassed about their financial situation. Filing for bankruptcy will also require payment of legal fees and court costs. And it may mean the loss of some personal property, depending on one's assets and level of income.

Bell says there is no hard and fast rule about if and when filing for bankruptcy is the right thing to do. "But certainly, if you're making only minimum payments on credit card bills, have exhausted your emergency savings fund, and have no access to other sources of cash like a loan from a family member, then it's likely you're headed toward bankruptcy," says Bell. "As hard as it may be to consider taking that step, you don't want to wait or you'll end up tapping out your retirement funds or refinancing your home. You want to protect your remaining assets for the long-term, and a bankruptcy gives you that option."

There are two types of bankruptcy filings -- Chapter 7 and Chapter 13. Laws vary by state, but generally a Chapter 7 filing allows for a liquidation of debt while a Chapter 13 bankruptcy helps you to reorganize your debt and work out repayment terms.

There's no question that going through a bankruptcy filing can be a stressful and embarrassing situation for many people.

"But it's not really the big black cloud that they might think it is. It's really there for those who need it as a safety net," says Bell. "It's admirable that you've tried but sometimes it's just better to discharge the debts and start over again."

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Paula S. McCarron has more than 20 years of experience in health care, including nursing homes and hospice. She lives in Chelmsford, Massachusetts, and can be reached at paulamccarron@gmail.com.

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