It's Never Too Late To Start From Scratch: Bankruptcy Booms Among Older Americans
WASHINGTON – August 8, 2018
For many pensioners, retirement is proving to be a time of bitterness and bankruptcy. Five times as many pensioners are going bankrupt than a decade ago, as older people face soaring levels of debt, new research has found. And this is not to mention vanishing pensions, soaring medical expenses, and inadequate savings.
In fact, seniors are the fastest growing segment of bankruptcy filers in the U.S, according to a 2010 study by law professor John Pottow at the University of Michigan.
The situation is only expected to get worse, as debt levels for those about to reach retirement age are also on the rise. On average, domestic savings are about 25 percent less than the previous year. Traditional ideas about life are being upended by a dismal reality: bankruptcy.
The lastest data shows that three times more people are now filing for bankruptcy than in 1991. From February 2013 to November 2016, there were 3.6 bankruptcy filers per 1,000 people 65 to 74; in 1991, there were 1.2.
According to the latest study, there is a three-decade shift of financial risk from the government and employers to individuals, who are bearing ever-greater responsibility for their own financial well-being as the social safety net shrinks.
Cheryl Mcleod of Las Vegas filed for bankruptcy in January after struggling to keep up with her mortgage payments and other expenses. “I am 70, and I am working for less money than I ever did in my life,” she said. “This life stuff happens.”
Although the actual number of older people filing for bankruptcy was relatively small — about 100,000 a year during the period in question — researchers said it signaled that there were many more people in financial distress.
“The people who show up in bankruptcy are always the tip of the iceberg,” said Robert M. Lawless, a law professor at the University of Illinois and author of the study.
The next generation nearing retirement age is also filing for bankruptcy in greater numbers, and the average age of filers is rising, the study found.
As the study from the Consumer Bankruptcy Project explains, “older people whose finances are precarious have few places to turn.”
“When the costs of aging are off-loaded onto a population that simply does not have access to adequate resources, something has to give,” the study says, “and older Americans turn to what little is left of the social safety net -- bankruptcy court.”
“You can manage O.K. until there is a little stumble,” said Deborah Thorne, an associate professor of sociology at the University of Idaho and an author of the study. “It doesn’t even take a big thing.”
The forces at work affect many Americans, but older people are often less able to weather them, according to Professor Thorne and her colleagues in the study. Finding and keeping one job is hard enough for an older person. Taking on another to pay unexpected bills is almost unfathomable.
Bankruptcy can offer a fresh start for people who need one, but for older Americans, it “is too little too late,” the study says. “By the time they file, their wealth has vanished and they simply do not have enough years to get back on their feet.”
A potential solution
The five most common questions about retirement and bankruptcy regard bankruptcy protection, distributions profit-sharing and its interactions with creditors, social security, and disability and health care through Medicare.
The bankruptcy project is a long-running effort now led by Professor Thorne, Professor Lawless, Pamela Foohey, a law professor at Indiana University, and Katherine Porter, a law professor at the University of California, Irvine. The project -- which is financed by their universities -- collects and analyzes court records on a continuing basis, following up with written questionnaires.
According to their latest published study, about three in five respondents said that unmanaged medical expenses played an important role in their decision to file. Over two-thirds indicated a drop in income. Almost three-quarters have blamed debt collectors. In total 895 people aged 19 to 92 took part in the survey.
The questionnaire asked filers what led them to seek bankruptcy protection.
According to the Employee Benefit Research Institute, a household headed by someone 65 or older had liquid savings of $ 60,600 in 2016, while the bottom 25 percent of households saved no more than $ 3,260.
This is taking into account the fact that more than 13 of these households are facing debt payments which are equal to more than 40% of their income, which is almost double the percentage of such families in 1991, the employee benefit institute found.
This in no way provides a protective financial cushion in the case of health problems. Generally, older Americans turn to Medicare to pay their medical bills. However, there are serious problems with high insurance premiums.
According to the Kaiser Family Foundation, by 2013, Medicare beneficiary’s out-of-pocket spending on health care was 41 percent of the average Social Security check.
More and more people are entering their later years carrying debt. For many of them, their mortgage debt was about 41 percent in 2016, compared to 21 percent in 1989, according to an Urban Institute analysis.
According to the latest private study, just over 7% of insolvent debtors were retired. The amount of seniors (60+) that file bankruptcy or consumer proposals with our firm has increased from 10% to 12% over the past two years. That statistic clearly indicates that more seniors are experiencing financial difficulty, and are making the decision to formally deal with their debt.
The problem with carrying debt into retirement is that it must be serviced with less income than when the seniors were working full-time. Some adaptation can be made by making only the minimum monthly payments on credit cards, which leads to a downward debt spiral, a journey that often ends with seeking assistance from a Licensed Insolvency Trustee.
If you already have debt when you retire, and your income drops when you retire, it may become impossible to service your debt and pay your living expenses.
Again, this is not to mention that older Americans’ finances are also being strained by the needs of those around them and that many pensioners financially help their adult children who are struggling to get on their own two feet. That can often deplete their retirement nest egg and even lead to new debt.
Marc Stern, a bankruptcy lawyer in Seattle, said he had seen the phenomenon again and again.
Some parents, Mr. Stern said, had co-signed loans for $10,000 or $20,000 for their adult children and suddenly could no longer afford them. “When you are living on $2,000 a month and that includes Social Security — and you have rent and savings are minuscule — it is extremely difficult to recover from something like that,” he said.
Your next option is to deal with the debt on your own, the lawyer notes. The pensioners could sell their house or liquidate investments like RRSPs, and use the proceeds to pay off debt. They likely don’t want to sell their house, but selling may be a wise financial move as they can eliminate their debts, and reduce their monthly living costs by moving to a smaller house or apartment.
In the case creditors might give them an opportunity to consider a debt consolidation loan.
With a debt consolidation loan, pensioners borrow from the bank at reasonable rates to pay off their high-interest debts, like credit cards. However, to qualify for a debt consolidation loan they might need pensioner's assets (like a house) to pledge as security.
Pensioners can also make full repayments of their debts through a debt management plan utilizing a non-for-profit services like credit counselors.
However, all of this might still not solve their problems, lawyers say.
Keith Morris, the chief executive of Elder Law of Michigan which runs a legal hotline for older adults, said the prospect of bankruptcy is a regular topic for his callers.
“They worked all of their lives, and did what they were supposed to do,” he said, “and through circumstances like a late-life divorce or a death of a spouse or having to raise grandkids, have put them in a situation where they are not able to make the bills.”
For Lawrence Sedita, a 74-year-old former carpenter now living in Las Vegas, the problems began when he lost his health insurance about two years ago. He said he had been on disability since 1991 when a double pack of 12-foot drywall fell on his head at work.
After his union, the New York City District Council of Carpenters changed the eligibility requirements for his medical, dental and prescription drug insurance, he lost his coverage.
Mr. Sedita, who has Parkinson’s disease, said his medical expenses had risen exponentially. (A spokesman for the union declined to comment.)
A medication that helps reduce Parkinson's syndromes rose to $1,100 every three months from $70, Mr. Sedita said. “I haven’t taken my medicine in three months since I can’t afford it,” he added.
He said he and his wife, who has cancer, filed for bankruptcy in June after living off their credit cards for a some time. Their financial difficulty, he said, “has drained everything out of me.”
In another case, Ms. Mcleod said she had managed to get by for a while after separating from her husband several years ago. Eventually, however, she struggled to make ends meet on her income alone, and she fell behind on her mortgage payments.
She collects a small Social Security check and works at an adult day care center for people with intellectual disabilities and mental health problems. For $8.75 an hour, she makes sure clients participate in daily activities, calms them when they are irritated and tries to understand what they need when they have trouble expressing themselves.
“When I moved here from Los Angeles, I was wondering why all of these older people were working in convenience stores and fast-food restaurants,” she said. “It’s because they don’t make enough in retirement to support themselves.”
Ms. Mcleod said she hoped that filing for bankruptcy would help her catch up on her mortgage so she could stay in her home. “I am too old to move out of here,” she said. “I am trying to stay stable.”
David Elliott, a debt specialist at UK's Moore Stephens, said recent retirees were locked into low annuity payments despite the economic recovery.
An improving economy helps those in work, but it brings fewer benefits for those who have already retired, he said.
"Pensioners are being hit by a combination of low annuity rates and low interest on bank accounts – and the result is that incomes will be much lower than a lot of them expected when planning their retirement," Elliott noted. "That makes it challenging to pay off debts from unsecured loans, credit cards and other high-interest forms of debt taken out by those who have retired recently."
A spokesman for the international charitable organization StepChange said pensioners in excessive debt should consider options other than bankruptcy.
"Creditors can apply to a court to make you bankrupt, but this can be an expensive choice for them, and they may be open to negotiating a repayment plan," he said. "If you think your creditor is about to make you bankrupt, or you want to talk through all the possibilities before deciding how to deal with your debts, speak to a debt adviser to see what options are available to you."
Debt is one of the primary factors in the crisis facing pensioners. The fact is that more and more people now reaching adulthood are in debt. Often it is due to a mortgage or student loans, which are taken by up by parents. Many of these debts are paid until their death.
Broken pension promises
Problems for those of retirement age are not only a public care issue but also effect the private sphere. It is about the companies where the current pensioners worked, as well as creditors and taxpayers.
There is a good argument to be made that large pension plans for former workers are deserved: they have put a lifetime into working for the public good of their state or regional government and should be rewarded accordingly, this is regardless of what there were the private or government companies. Yet the problem is that, if the state’s public pension plan cannot afford to provide the retirement promises it has made, that money must come from somewhere else: taxpayers.
Most state and local governments have enacted some sort of public pension sector reform in recent years. The NASRA detailed these changes from 2009 to 2025, considering the various developments which took place. Over 40 public sector pension plans in a total of 36 states increased member contributions – some temporarily, most indefinitely or permanently. The majority of these contribution increases have been for new employees only, although a small number of plans have applied them to existing workers.
Benefits to which pensioners are entitled have also been adjusted downwards in a total of 39 states. Eight of these states reduced the cost of living adjustments for new workers, while eight did so for current and new employees and 14 states did so for pensioners. Nine states also raised their vesting period for new hires from five to 10 years, while 29 states raised resignation eligibility either through increased years of service or the age at which an employee can begin to recieve their pension.
Despite these efforts, the funding gap persists, in particular where it is not possible to change pension plan terms for existing employees. It is difficult to achieve any meaningful reforms. The problem is that it is difficult to assess where reforms should, or even can, be made. For example, in the case of the CPS pension system, the brunt of savings have been felt by the newest hires in the school system, who have received vastly reduced pension plans compared with those of pre-existing employees.
There is reason to believe that it would be unfair to trim the pension payouts that had previously been promised to retirees or current employees. Changing the terms of these pensions now would likely alter many people’s retirement plans.
However, not reneging upon these now-unfindable promises nonetheless undermined others, such as CPS students who now no longer receive the appropriate resources. This is not to mention the growing pensions obligations to be paid for out of resources intended for the use of future generations and other groups.
US state and local governments will have to confront this seemingly unsolvable issue: pay what has been promised, even if it can be agreed that those promises should never have been made. The only alternative is to force taxpayers and future hires to foot the bill. If the state is not able to cope with this problem, then it is necessary to change the system as a whole.
Either way, the problem of pensioner's filing for bankruptcy is growing worse with each passing year. According to researchers, these problems must be squarely addressed now, otherwise, the U.S. is risking a financial crisis for the elderly.