Wednesday, September 23, 2015


Today, many people are either putting off or struggling during retirement due to the debt that they incurred during their working career.  Incredibly, filing bankruptcy may be a part of a viable retirement strategy.

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.