The Golden Years and Debt
Major changes older people face often have a dramatic impact on their finances. Someone who is not realistic in dealing with these changes can be trapped by expenses and spending that quickly deplete savings. The result can be large debts and even the loss of a home. If these are problems you face, here are some important points to think about.
Changes often causing older people to fall into debt include:
- Loss of a spouse and the spouse's income;
- Loss of health insurance;
- Illness or injury leading to medical bills;
- Loss of the ability to work and earn income; and
- Retirement on a fixed income.
When any one of these changes happens, you need to respond quickly. Adjust spending or you may start down a path that leads to debt. Of course, this advice is easy to give but hard to follow. It is not easy to change spending habits developed over a lifetime. But changing your spending patterns and how much money you spend may be the only way to avoid the pain of financial problems.
When you are faced with a major life change, it is important to take stock of what makes sense financially. Take a look at:
- car payments;
- housing costs;
- medical insurance;
- financial assistance to adult children;
- entertainment expenses (this includes gambling casinos!);
- changes to income; and
- Credit card balances, payments and use.
By adjusting your living expenses and planning for a reduced income, you can help avoid the debt trap.
There are lots of ways people try to maintain spending patterns when faced with loss of income or greater expenses. Two popular ways to deal with this problem are using credit cards and borrowing against your home to pay off credit cards and other debts.
The Credit Card Trap
Credit cards are easy to get. More than three billion credit card offers are mailed out to consumers each year. According to the National Consumer Law Center, credit card problems are the leading cause of Chapter 7 bankruptcy filings. The average credit card debt for Americans age 65 to 69 is around $6,000. Since 1993, more than a million people over age 50 filed for bankruptcy.
Credit cards can be a dangerous trap to catch borrowers. The bait is what looks like a quick and easy solution to pay medical bills and living expenses. Credit card interest rates may start out low but they can go up over time. Part of the trap is what happens if you get behind on monthly payments. Interest rates can skyrocket and late payment charges start getting added. Credit cards are a very expensive way to pay for living expenses. Also, credit card debt collectors can be very aggressive with phone calls and letters. A large number of Iowa Legal Aid's Hotline calls about credit card debt are from people asking for help in dealing with debt collector harassment.
Once your credit card debt gets to where you can only make the minimum payment, the trap has closed. At this point, most of what you pay is little more than interest on the debt. If you are unable to pay more each month, the debt will never be paid off. Because most older people are unable to increase their income, they look for other ways to pay off what they owe. Some turn to another credit card to bail them out. When this house of credit cards starts to fall and the debt collectors start to call, people are in danger of falling into trap number two.
The Home Mortgage Trap
Many older people turn to their home as a source of money to pay off credit card or doctor bills. This may seem like a good way to stop debt collector harassment. It is almost never a good idea to convert debt like credit cards and medical debt into a new mortgage on your home. By Iowa law, your home is protected from credit card creditors but not from mortgage lenders. Credit card debt is usually "unsecured debt." This is one reason why credit card debt collectors are so aggressive. They know they can't repossess your car or take your home, so they try to scare you into paying voluntarily. A home mortgage is different. It is a "secured debt." If you don't make your mortgage payments the lender can foreclose and take your home. By mortgaging or refinancing a home to pay unsecured debts, you give your creditors the potential power to force you out of your home.
Get Help Before You Get Caught
Usually clients call the Legal Hotline for Older Iowans after getting caught in one or both of these two traps. Calls, letters, and harassment from debt collectors can be very upsetting to them. It is even worse to lose a family home paid for in full many years ago. For both older and younger Iowans, avoid the debt trap of using credit cards and mortgages for living expenses.
Tips to Avoid the Credit Card and Home Mortgage Traps
- Adjust spending when faced with loss of income.
- Do not use credit cards to pay for living expenses. Instead, reduce living expenses.
- Do not mortgage or refinance your home to pay off credit card or medical debt.
- Always pay necessary living expenses before making payments on credit card and medical debt.
- Get debt counseling as soon as you see you are heading for trouble.
Getting Out of the Debt Trap
If you are already caught in the debt trap, you need to know some basic facts. First, the United States does not have debtor prisons. Second, debt collectors in almost all cases cannot take income coming from protected sources. After a creditor gets a court judgment against a person for a debt, some income is exempt. Exempt income includes Social Security, all types of pensions, and unemployment checks. In most cases, those funds cannot be garnished or taken from bank accounts. This exemption protects people on fixed incomes from being unable to pay their day-to-day living expenses. Social Security and pensions are not fully protected from collection for money owed to the federal government, for federally guaranteed student loans, and for back-owed child support or spouse support.
Iowa Law Protects Some Types of Property
Under Iowa Law, certain property is exempt from collection by creditors through the courts. This list of protected property is found in Iowa Code section 627.6. The list was updated effective in July 2006. In addition to a person's homestead, other property creditors cannot take includes the following:
- one motor vehicle up to $7000 in value;
- household goods up to $7000 in value; and
- cash, bank deposits, or other property not otherwise listed up to $1000.
These exemptions protect your ability to maintain a home and livelihood even when you are in debt. Before refinancing your home check to see if your income and property are protected from collection.
Options to Consider
The first option to explore is debt counseling. Can you manage and pay off the debt based on your fixed income? This review of your debt and income must be completely honest and realistic. You must be able to pay your creditors back and still make payments for housing, utilities, health insurance, food, car expenses and other basic living needs. If the debt can be repaid while still paying these necessary living expenses, then explore the options of a payment plan, consolidating or refinancing debt.
The second option for debt is to file bankruptcy. Bankruptcy is a way to "discharge" (eliminate) most unsecured consumer debts. It may also help you keep certain property such as your home and car. Filing for bankruptcy is a way to settle most debt issues at one time. The same property exemption (protection) list applies for bankruptcy. Note that some debts such as child support, some taxes, government student loans and secured debts will not be eliminated by bankruptcy. Filing for bankruptcy is hard to do without a lawyer and Iowa Legal Aid seldom assists with bankruptcy. After filing bankruptcy, you cannot file again for 8 years.
Before thinking about bankruptcy, you should fully evaluate your financial situation. This includes your ability to repay debts as well as your need for bankruptcy protection. Check to see if your income and property are already protected from collection without the need for bankruptcy.
You may not be able to pay all of your bills and must decide which ones to pay and which ones not to pay. If you don't pay secured debts (like a car loan where the creditor has a lien on the car), creditors can get the property if they have a lien on it. If you can't pay your unsecured debts, creditors will still contact you. They can still sue you in court. Giving priority to secured debts may be the best choice if your income and resources are all exempt from collection on a court judgement. You can stop most debt collection phone calls by sending debt collectors a letter asking them not to contact you.
After a lifetime of successfully managing family finances, many people are embarrassed to admit having debt problems. Sadly, many older people put their heads in the sand and keep juggling the debt. They make a partial payment here, get a second mortgage there, and open another credit card account or two or three. This may hold back the debt tide for some time. But eventually no one will lend any more money. The debt collection harassment can become too much to bear. You can call Iowa Legal Aid's Hotline for Older Iowans at 1-800-992-8161 (or 282-8161 in Des Moines) for help with these problems.
(This information is from the Legal Hotline for Older Iowans, funded in part by the U.S. Administration on Aging)