I
am seeing more and more clients where credit cards and other debts have simply
become an accepted part of life. As they
progress from their career toward retirement, the credit cards are paid down at
the same rate as new purchases are added to the accounts. A lifetime of minimum payments has simply
done nothing to reduce the balance. Furthermore,
during the years prior to retirement, one would be far better off using the
money being thrown at debt payments to increase their retirement accounts or to
pay down the mortgage on a house that they intend to live in during retirement.
If
you have debt when you approach retirement, the income you receive from your
retirement sources (Pension / Social Security) may simply not be enough to
manage the debt payments. If you
continue making minimum payments (and stop making more purchases on the
account) you will normally be facing a remaining 35 years to pay off the
balance. You will essentially be wasting
that money and reducing the available funds for normal living expenses, travel,
and other things you want to accomplish during retirement. Also remember that if you have a card that is
close to its limit and you’re paying $500 a month just to free up some
available credit to use during that month (don’t forget all the interest you’d
be paying), you’d be better off getting rid of the credit card and use the $500
to simply purchase the things you need by cash.
So
if you find yourself approaching retirement with lots of debt, you might want
to speak with an experienced bankruptcy attorney just to discover your
options. If you do not have large
amounts of luxury or non-exempt assets, and if your current income will allow
the filing of a Chapter 7 bankruptcy, this might be a good option. Even if your current income is too high prior
to retirement, remember that once you retire and your income goes down
dramatically, you might be eligible to file a Chapter 7 case at that time. Remember that when you file a bankruptcy,
your retirement assets such as your 401K, IRA or PERA are exempt and cannot be
taken by creditors.
Here
is a common scenario:
Suppose
a husband and wife, Mark and Jane, are around 55 with grown children and have a
combined income of about $65,000 a year. They have minimal property other than
a residence with about $70,000 in equity and about $50,000 in credit card and
medical debt. Their minimum monthly payments on their debt is about $1,500 a month,
thereby preventing them from putting any savings into a retirement plan. Currently this couple will qualify for a
Chapter 7 bankruptcy and will not lose any property by filing. By filing, instead of paying $1,500 a month to
their creditors, they would instead put that money into a 401K or IRA. They would have been forgiven $50,000 in debt
and over the next 10 years might have saved over $180,000 in their retirement
fund. During the years prior to
retirement, as long as they did not build up any new credit card debt, this
would likely allow them to pay cash for their normal living expenses and would vastly
improve their retirement prospects. This
is much better than the path they were originally on: a)
having no retirement savings, b) having paid $180,000+ in minimum payments to
the debt over 10 years – mostly interest (Remember $1,500 per month for 10
years), and c) still having about $50,000 in debt remaining due.
Obviously,
proper planning, consultation with an experienced bankruptcy counsel and the
ability to refrain from building up unnecessary new credit card debt is
required. But it is an option worth
investigating. Retirement is meant for
relaxing and doing those things you’ve always meant to do. It’s not for repaying the mistakes you made
back in your 30’s, 40’s and 50’s.
