Bankruptcies have reached an all-time high, and it has been reported that Americans over 50 are the fastest-growing age group in bankruptcy. More than 450,000 of them filed for bankruptcy in 2002, a number more than two and one-half times the number who filed just a decade ago. It appears that a combination of easy credit and hard economic times are causing older people, particularly those 50 to 65, to accumulate high levels of mortgage and credit card debt, coming at a time when recovery from a bleak financial picture can often be difficult. Here’s a look at the problem and some tips for how can you work your way out of debt.
Americans over 50 are becoming overwhelmed with debt
There was a time when older Americans would not incur any debt at all, preferring to pay with cash for all transactions. Experts blame the current financial problems of older Americans on many factors, including high, uninsured medical expenses, death of a spouse, job loss, financial support of children or grandchildren, and less retirement income due to the stock market downturn. With interest rates so low, it is very easy to get credit, even home equity loans, and many people have used borrowing to maintain living standards, a circumstance which simply did not exist years ago in this age group.
The problem can spiral out of control
A few decades ago older people did not even have credit cards. Now they owe thousands of dollars on those cards. While individuals over 50 are still more likely to pay off monthly credit card balances than younger people, many are so overwhelmed by debt that they borrow against their homes to stay afloat. Rather than talk to creditors or try to get credit cards with lower interest rates, older Americans may be borrowing against their home. The combination of low interest rates and inflated home values have spurred a refinancing frenzy as older homeowners replace their 30-year mortgages with shorter ones. A growing percentage of mortgage debt, however, consists of home equity loans or lines of credit (not borrowing for a primary mortgage). The proceeds of these loans are often spent on cars, vacations and home improvements, to help maintain lifestyles. Homeowners with a lot of debt or low credit ratings are prey for lenders who charge outrageously high fees and interest rates. Borrowers who fall behind on loan payments could lose their home.
Is bankruptcy right for seniors?
Filing for bankruptcy is a serious step that should be taken only as a last resort, and only after weighing the pros and cons with an attorney experienced in bankruptcy law. The fact that you filed for bankruptcy will stay on your credit record for ten years, while unfavorable information in your credit file will stay there for only seven years. This may make getting credit in the future more difficult since a credit record with unfavorable information may make it more difficult for you to get a mortgage for your house, to rent an apartment, or to obtain a car loan. If you are over 50 and want a loan for a new venture like starting a business or investing in a real estate project, having the bankruptcy on your credit record for ten years is an especially long time and may prevent you from ever getting into that new venture since you may not be able to get credit until too late in life. In addition, bankruptcy does not necessarily discharge all of your debts, which means that you will remain liable for debts like most taxes, alimony, child support, and student loans even after going through the bankruptcy process. That’s why if you can work out your payment problems in other ways you should try to do so.
Start digging out of the hole
Debtors who are unable to get their finances back on track themselves may want to turn to a debt counselor. The 1,300 accredited non-profit agencies of the National Foundation for Credit Counseling, helped 1.5 million households in 2002. Certified counselors at agencies like these help clients make budgets, cut spending, and negotiate with creditors to lower payments. Reputable agencies tailor payment plans to the circumstances of each client, sometimes offering services for free. But be careful, because many of these debt counselors are not reputable. Get references and don’t give personal information until you are confident that the counselor is a legitimate entity.
Tips to get your finances back on track
There are several things you can do to get your finances in order:
1. Admit that you have a problem and act now. Itemize your household and living expenses and put together a budget of essential items that you need to spend each month.
2. Prioritize your debts. Protect your home first because you can lose it if you don’t pay your mortgage in timely fashion. Credit card and medical debt, for example, can be pushed back somewhat (though you may incur interest charges if you do so).
3. Call your creditors now. Explore various bill-paying options. See whether the credit card company will give you a lower interest rate on your outstanding balance or whether better deals are available at a lower interest rate.
4. Be very careful with refinancing credit card debt with a home equity loan. This could have a disastrous result of converting unsecured debt to secured debt where you could lose your home if you can’t make the payments. Even though the home equity loan interest rate may be very low, be confident that you can make every monthly payment before embarking down this course.
5. Get professional help. A consumer credit counseling service may be of help. Be sure to work with an accredited non-profit credit counseling agency and don’t reveal personal information to an agency you don’t know. If you are in a low income bracket, legal aid might be the answer.
If you are compulsively using your credit cards, consider cutting them up and paying for everything by cash or check.
Help is available:
The AARP is a wonderful resource which publishes a “Borrowers Guide to Home Loans.” You can learn about the guide at AARP’s Web site at: www.aarp.org
The National Foundation for Credit Counseling, is a nationwide network of non-profit debt-counseling agencies. To find a local agency, use NFCC’s Web site at: www.nfcc.org, call 800-388-2227, or write to the NFCC at 801 Roeder Road, Suite 900, Silver Spring, MD 20910.
Contact the Association of Independent Consumer Credit Counseling Agencies. The AICCCA is a national membership organization of non-profit debt-counseling agencies. To find a local agency, go to the Web site at: www.aiccca.org, call 800-450-1794 or write: 11350 Random Hills Road, Fairfax, VA 22030-6044.
The National Center on Women and Aging at Brandeis University. The organization’s Web site offers various articles and resources about credit and debt. Contact the Web site at: www.heller.brandeis.edu.
Copyright 2003 by Alan S. Kopit. All rights reserved. Alan Kopit is a consumer attorney with the firm Hahn Loeser and Parks LLP in Cleveland, Ohio and a regular contributor to “Today.”