Bankruptcy is the new way to a secure retirement?

[REWahoo]

From a USA Today personal finance article: Filing bankruptcy in retirement may not be such a bad idea

Elder Americans carry 50% more credit-card debt than their younger counterparts, the Michigan survey showed.

For many, bankruptcy carries a stigma of personal failure and shame. But sometimes, Salt said, it's their only option — and not necessarily a bad one.

Of course, the big question most seniors have when it comes to bankruptcy is: Will they take all of my retirement savings and leave me penniless?

"No," Connolly said. "Social Security and retirement accounts (up to approximately $1.1 million) are exempt from creditors so seniors will continue to have that stream of income."

"The myth of bankruptcy is that you have to give up all your property and live under a bridge," Connolly said. "That's not fact. Most people don't lose anything."

If the above is accurate, which I question, why wouldn't a growing number of seniors deliberately run up a bunch of unsecured debt then declare B? This article makes it sound like a great way to get a free (OK, more like heavily discounted) lunch.

 

[Gumby]

Some things to consider:

1. There is now a Chapter 7 means test. See 11 U.S.C. 707. In broad terms, if over the six months prior to the filing of the bankruptcy petition your income exceeded the median monthly income for your state, then you will not qualify for Chapter 7, which wipes out your unsecured debts. Rather, you will need to use Chapter 13, which requires a plan to repay at least some of the debt over 5 years.

2. Deliberately running up your credit cards with no intention of repayment opens you up to a non-dischargeability complaint under 11 U.S.C. 523. You may file bankruptcy only to find that the credit card company obtains a judgment that your debts are non-dischargeable and you will continue to owe them.

In sum, not as easy as the article make it look. Disclaimer: I never practiced in the area of individual bankruptcy, so don't rely on what I say. If you really are having financial difficulty, talk to a lawyer who does specialize in this area.

 

[BLS53]

Many retirees with debt problems, don't even need bankruptcy protection. The exemptions in bankruptcy, also exist for judgment enforcement. If a person's sole means of income is from SS/pensions/401K, none of that income can be garnished.
The main issue is the homestead exemption, which is state dependent.

I don't think many well-heeled retirees, are going to deliberately run of their credit cards for a free ride. Most value their credit rating, and have enough means, that they don't need to resort to such tactics.

The other side of the coin, is the 70 year old in poor health, slaving away at Walmart in order to feed the credit card banks. In this case, ethics aside, walking away may be an option.

 

[ls99]

So if a geezer maxes out all credit and has no assets, then dies, Can the creditors sell his body parts to make up some of the losses.

Too much time time on my hands, strictly idle thinking.

Speaking of body parts. Who owns the body after death, can one will it to the estate?

ADD..... IIRC Alistair Cook was pretty well parted out after his demise.

 

[teejayevans]

BTW, 401Ks are protected but IRA protection is state dependent.
TJ

 

[W2R]

Elder Americans carry 50% more credit-card debt than their younger counterparts, the Michigan survey showed.

If an elderly American dies with $50K in credit card debt, he/she probably regards that as a $50K addition to their retirement nestegg. I don't think it necessarily means that he/she intends to go into bankruptcy.

 

[Sam]

If the above is accurate, which I question, why wouldn't a growing number of seniors deliberately run up a bunch of unsecured debt then declare B? This article makes it sound like a great way to get a free (OK, more like heavily discounted) lunch.

I believe the above is accurate. May be seniors do deliberately run up a bunch of unsecured debt (mostly Credit Cards), they just don't brag about it in public. And there is no reason for them to declare bankruptcy unless/until they are being sued. CC companies are usually "smart" enough to not sue for recovery of unsecured debt. It's a lose-lose situation for them.

 

[Sam]

BTW, 401Ks are protected but IRA protection is state dependent.
TJ

That's news to me. I thought that both 401k and IRA are treated the same in bankruptcy. Can you provide a link?

 

[swampwiz]

BTW, 401Ks are protected but IRA protection is state dependent.
TJ

WRONG! The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 specifically defines any retirement account as being exempt from liquidation (up to some huge limit, like $1M.)

 

[swampwiz]

I believe the above is accurate. May be seniors do deliberately run up a bunch of unsecured debt (mostly Credit Cards), they just don't brag about it in public. And there is no reason for them to declare bankruptcy unless/until they are being sued. CC companies are usually "smart" enough to not sue for recovery of unsecured debt. It's a lose-lose situation for them.

A senior could just claim that he was intending on getting back into the work force - which so long as he would not be legally disabled would be considered as him having the reasonable expectation that he could find work, and thus not be considered by the court as fraud.

Most creditors giving unsecured credit simply go by their credit score default models (i.e., the probability of default for a debtor with a certain credit score) and presume that any debt would not be able to be proven to be fraudulent. That said, if there is a particularly egregious situation (e.g., big cash advance, no payment made on it, followed by bankruptcy filing, etc.), then the creditor will go after the debtor.

The only other way a creditor could make a case is by periodically reviewing the debtor's income situation, using documentation (e.g., tax form, pay stub, etc.), as even falsely entering an income amount on a signed application (to say nothing of asking for income over the phone) is not considered to be fraud (supplying forged or fraudulent documentation, OTOH, would be fraud.)

 

[Buddha44]

WRONG! The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 specifically defines any retirement account as being exempt from liquidation (up to some huge limit, like $1M.)

I'm not a bankruptcy attorney so seek adequate counsel. However, I believe both are correct to some extent. The distinction, as I understand it, is that certain plans such as 401(k) and 403(b) plans enjoy unlimited protection from creditors in any state, in or out of bankruptcy, as stated by TJ. With respect to other plans, such as IRAs, it depends on each state. However, at a minimum, as noted by swampwiz, BAPCA protects IRAs and other plans up to $1 million but only in bankruptcy. Presumably, if the state provides greater protection for IRAs, BAPCA does not reduce it.

 

[bizlady]

Interesting discussion from another perspective. If a married couple is retired, and one of them becomes seriously ill or is in an accident, then bankruptcy to wipe out the medical bills and preserve the assets??

 

[teejayevans]

That's news to me. I thought that both 401k and IRA are treated the same in bankruptcy. Can you provide a link?

http://ezinearticles.com/?IRAs-and-Qualified-Plans-Offer-Limited-Asset-Protection&id=2677181

IRAs Could Be Fair Game in Lawsuits - latimes.com

State Exemption Chart on Creditor-Debtor Issues

TJ

 

[teejayevans]

WRONG! The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 specifically defines any retirement account as being exempt from liquidation (up to some huge limit, like $1M.)

No, your WRONG!! As Budda already posted, state IRA protection has limitations in some states, see the state exemption chart I posted a link to.
TJ

 

[Gumby]

How about if we disagree in a slightly more respectful manner? Thanks.

 

[frank]

if an older person runs up a bunch of credit card debt and then dies, is this then considered income and taxed on the estate?

 

[BLS53]

if an older person runs up a bunch of credit card debt and then dies, is this then considered income and taxed on the estate?

Depends on what the estate is worth. The debts would have to be paid from the estate. If there's not enough in the estate to cover the debts, then the creditors are SOL.

As to income, what you're speaking of is known as forgiveness of debt, which involves the creditor(s) issuing a 1099C. The IRS can't collect on this income, if the estate is insolvent.

I'm not an attorney, but have dealt with these issues as an executor.

 

[ERD50]

if an older person runs up a bunch of credit card debt and then dies, is this then considered income and taxed on the estate?

Depends on what the estate is worth. The debts would have to be paid from the estate. If there's not enough in the estate to cover the debts, then the creditors are SOL.

As to income, what you're speaking of is known as forgiveness of debt, which involves the creditor(s) issuing a 1099C. The IRS can't collect on this income, if the estate is insolvent.

I'm not an attorney, but have dealt with these issues as an executor.

It becomes clear why the CC cos charge such high interest rates.


-ERD50