In our last blog we talked about how more older Americans are in financial distress, and some of the reasons for this. This is certainly true here in Oregon. In our experience helping our local older neighbors over the years, we have learned that there are special legal and practical considerations that apply when it comes to bankruptcy and other potential solutions. Our next few blogs will focus on these.
These considerations can be organized into the following categories—those involving debts, income, expenses, assets, credit record, and strategy. Today’s blog covers the first of these.
Special Debt Considerations—
1) Greater Need to Preserve Collateral:
In general, if you are an older American, for a number of reasons you likely need and want to keep most or all of what you own that is collateral on your secured debts. Your home, your car or truck, furniture, appliances—you rely on these to maintain a stable and healthy life. And you may have more limited prospects for acquiring replacements if you were to lose them now.
The two kinds of consumer bankruptcy—“straight bankruptcy” Chapter 7 and “adjustment of debts” Chapter 13—both help you keep collateral in numerous ways.
Chapter 7 eliminates all or most of your other debts so that you can better afford to make the payments to your secured creditors. You can almost always keep any collateral that you are current on, and you are usually given at least some time to catch up if you are not. You can also often wipe out judgment liens so that they are no longer on your home’s title. Chapter 7 can also discharge (legally write off) older income taxes, preventing the IRS and the Oregon Department of Revenue from putting tax liens on and seizing your home, vehicle, and other possessions.
Chapter 13 lets you similarly focus your limited financial resources on your secured debts so that you can keep your collateral. But it also comes with a number of other very important tools. Through Chapter 13 you may be able to “strip” 2nd and 3rd mortgages off your home so that you would no longer need to make those monthly payments. You may qualify for a “cramdown” on your vehicle and other collateral, allowing you to lower your monthly payment, the interest rate, and how much you pay overall. And if you are behind on either a home mortgage or vehicle loan, you would be given years to catch up. Finally, throughout the 3 to 5 years that you are in your Chapter 13 case, you and your collateral are protected from your creditors, as long as you follow the payment plan that you propose and is approved by the bankruptcy court.
2) More Secured Debts with Equity:
Our older clients tend to have more equity in their homes and vehicles, so that some of them are “asset rich and income poor.” That can be a challenge because there are limitations in bankruptcy as to how much equity is allowed before the collateral is at risk of being taken away by the bankruptcy trustee on behalf of the creditors.
There are two solutions to this: asset-protection planning and Chapter 13.
Various legitimate strategies exist for asset-protection before filing bankruptcy. The specifics of these are beyond the scope of this blog, but two suggestions are worth mentioning: 1) see an attorney early rather than late, and 2) get the right attorney.
Most asset-protection strategies take some time to implement safely, so you do not want to be caught in a situation in which you need urgent bankruptcy protection. And these strategies require some legal sophistication and must be executed carefully. You need an attorney who focuses on bankruptcy and debt solutions, and is conscientious—like the two attorneys of the Portland Bankruptcy Law Group, who bring you this blog and this website. (If you are in the Portland, Oregon area, please contact us.)
Chapter 13 can protect your collateral if you have more equity than is allowed—more than is “exempt.” You pay your creditors more over the 3-to-5-year plan to keep what you would otherwise lose in a Chapter 7 case. But sometimes the extra that you pay isn’t really extra when it just goes to pay something else that would need to pay otherwise, such as income taxes that can’t be discharged. Overall, Chapter 13 can be a tremendously helpful way to reduce your monthly debt service and bring stability to your immediate and long-term financial life.
3) Student Loans Potentially More Amenable to “Undue Hardship” Discharge:
It is very difficult to discharge virtually all student loans. As one court put it a few years ago:
the debtor must prove that: (1) he cannot maintain, based on current income and expenses, a “minimal” standard of living for himself and his dependents if required to repay the loans; (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and (3) the debtor has made good faith efforts to repay the loans.
As more and more student loan borrowers move into their retirement years, for at least some of them meeting these requirements will become easier. For example if you are on a fixed income that is only sufficient for “minimal” expenses, and for health reasons you cannot reasonably be expected to earn any additional income, that would go a long way towards meeting the first two of the above requirements. Also, the law will likely evolve—either by statute or court decisions—perhaps to ease the requirements themselves. As a result, it is becoming worthwhile for at least some borrowers to ask the bankruptcy court for that elusive “undue hardship” discharge.
4) Continuing Health Care Costs Affecting Timing:
A bankruptcy—whether Chapter 7 or 13—deals with debts that are owed as of the time the case is filed. Debts that accrue after that, including medical ones, aren’t included and aren’t discharged.
This can make for delicate timing in the filing of a bankruptcy case if you and/or your spouse have ongoing medical conditions and can anticipate significant ongoing medical bills larger than your capacity to pay them. The simple bottom line on this is to be sure to have an attorney who will directly address this issue and discuss the options with you clearly, so that together you can make the best possible timing decision within your circumstances.