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BANKRUPTCY IN THE AGE OF RETIREMENT

RISING RATE OF SENIOR FILERS

        In 2011 a noted bankruptcy legal scholar at the University of Michigan Law School published a working paper where he documented the rise in the rate of bankruptcy filing rates for elderly Americans.  While the overall rate was only seven percent of the bankruptcy filing population, the rate has increased 177 percent for the 65-74 age group and a staggering 566 percent for the 75 and older age group.  In May, 2015 the New York Times noted this new reality.  There are certainly many factors at play in this dynamic, including a witch’s brew of fixed income, rising medical costs and high credit card debt for a majority of the bankruptcy filers.  No doubt the recession of 2008, with its hard impact on housing and retirement was an additional major factor.  Bankruptcy also has a favorable treatment of social security and retirement income savings.

BANKRUPTCY OVERVIEW

        Bankruptcy is purely a creature of federal law, with reference to state exemption laws that may be used in lieu of federal exemptions.  When a person or couple files for bankruptcy, everything they own, except that which is exempt is part of the bankruptcy estate.  It is critical to note that there are sometimes huge exemptions that can protect many families and couples retain their life’s savings and assets.  The most important asset that most people think about is their family home.  If it is a personal residence, there are large exemptions for the equity you have in it.  The exact amount is dependent upon the county in which the house is located, anywhere from $75,000 to $150,000.  For those above that amount, a chapter 13 plan may be warranted.   Next concern for those who are retired or near retirement is their retirement savings.  Bankruptcy provides an exemption of up to $1,000,000 for IRAs and an unlimited exemption for employer based retirement accounts.  Exemptions for motor vehicles provide modest protections.  After filing, the debtor(s) must appear at a creditors hearing.  The hearing is a legal event where the debtor is placed under oath and subject to the laws of perjury.  It is conducted by a trustee, not a judge, who asks questions about what led the debtor(s) to file and to better explain their financial health.  One of the questions of particular importance is whether the debtor(s) transferred anything in the previous two years or transferred any money to a self-settled trust in the ten years previously.  In addition, there will likely be questions about anticipated changes in income in the next year.

AFTER BANKRUPTCY, INTO RETIREMENT

        If there is a heavy financial burden due to medical bills, credit card debt but anticipate retiring or cashing out on retirement accounts in the next several years bankruptcy may be a valid and appropriate avenue for relief.  It clears the financial ledger sheets prior to cashing out on retirement accounts when your money would be more vulnerable to creditors.  Provided you keep there are no financial mistakes, it helps you create a starting point where credit scores start to improve.  While discharge of debt generally impacts tax liability, there is an exemption for debt discharged via bankruptcy.  Bankruptcy does not impact Medicare look back period, as the question is what assets or property were transferred.

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