In my last blog I talked about how more and more older Americans are in financial distress, and touched on some of the reasons for this. This is certainly true here in California. In my experience helping our older neighbors through the years, I've learned that there are special legal considerations and practical ones that apply when it comes to bankruptcy and other potential solutions. I'll hit some of these in my next few blogs, starting with this one.
I've organized these considerations into the following categories—those dealing with debts, income, expenses, assets, credit record, and strategy. Today's blog covers debts.
Debt Considerations for Older Californians—
1) More of a need to hold onto collateral:
If you are an older American, for a variety of reasons you are more likely to need and want to preserve most or all of what you own as collateral on your secured debts. Financially, and perhaps emotionally, you rely a lot on your home, your car or truck, furniture, and appliances. You need these to maintain a stable and healthy life. Replacing them would likely be more difficult if you were to lose them now. You may have had them for a fair amount of time, and are worth a lot more to you than just their monetary value.
Both kinds of consumer bankruptcy—"straight bankruptcy" Chapter 7 and "adjustment of debts" Chapter 13—can help you keep your collateral in a number of distinct ways.
Chapter 7 eliminates—"discharges"—all or most of your other debts so that you could more realistically make the payments to your secured creditors. You are usually permitted to keep any collateral that you are current on. And if you are not current, you are usually given at least some time to catch up. You can also often "avoid"—get rid of—judgment liens so that they are no longer encumbering your home. You may also be able to "avoid" security interests in some of your possessions so that you don't have to pay those debts. Chapter 7 can also discharge older income taxes, preventing the IRS and the California Franchise Tax Board or other tax agencies from placing tax liens on and/or seizing your home, vehicle, and other possessions.
Chapter 13 also lets you focus your limited income on your secured debts so that you can keep your collateral. But it also comes with a number of other extremely helpful tools. 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. Through Chapter 13 you may qualify for a "cramdown" on your vehicle and other collateral, a re-writing of the loan which would lower your monthly payment, the interest rate, and how much you would pay before the collateral is yours free and clear. And if you are behind on either a home mortgage or vehicle loan, you could have up to 3 to 5 years to catch up. Finally, throughout that length of a 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 judge.
2) More equity to protect in your collateral:
Our senior clients tend to have more equity in their homes and vehicles, making some of them "asset rich and income poor." That can be a problematic because of limitations in bankruptcy about how much equity you can have—the "exempt" amount. If you have too much in a Chapter 7 case, the collateral becomes at risk of being taken away by the bankruptcy trustee on behalf of the creditors.
There are two solutions to this: A) asset-protection planning and B) Chapter 13.
A) Legitimate legal strategies may be available for asset-protection before filing bankruptcy. Their specifics are beyond the scope of this blog, but let me mention two suggestions: 1) get the needed legal advice earlier rather than later, and 2) get the right attorney for that advice.
Asset-protection strategies tend to take some time to implement safely, so don't be caught in a situation where you need urgent bankruptcy protection and haven't retained an attorney to protect your assets months or even years earlier.
These strategies also require some legal sophistication and must be executed carefully. You need an attorney who has focused years of lawyering on bankruptcy and debt solutions. You need one who is conscientious. If you are in Southern California, consider contacting the two attorneys of the Southern California Law Advocates, PC, who bring you this blog and this website. (Please click here to contact us.)
B) Chapter 13 can protect your collateral if you have more equity than is "exempt." You pay your creditors over the 3-to-5-year plan to keep what you would otherwise lose in a Chapter 7 case. Sometimes you have to pay extra for that benefit, but other times the extra that you pay merely pays something else that you would need to pay otherwise, such as income taxes that can't be discharged.
In this way and many others, Chapter 13 can be a tremendously helpful way to reduce your monthly debt payments and bring you immediate and long-term financial stability.
3) Student loans more likely to qualify for "undue hardship" discharge:
It is quite difficult to discharge most student loans. As one court laid it out:
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 student loan borrowers move into their retirement years, at least some of them will have an easier time meeting these requirements. For example, if you are have a fixed income, can only afford to pay for "minimal" expenses without paying the student loan payment, and for health reasons you cannot reasonably be expected to earn any additional income, that would seem to go a long way towards meeting the first two of the above quoted requirements. Also, the law will likely evolve—either by statute or court decisions. The requirements themselves may be eased. Asking the bankruptcy court for that elusive "undue hardship" discharge will likely become worthwhile for at least some borrowers.
4) Continuing health care costs affecting timing:
Both Chapter 7 and Chapter 13 cases deal with debts which are owed as of the time the case is filed, not ones that become due
after the date of filing. Debts that accrue after that, including involuntary one like medical bills, aren't included and so won't be discharged in that bankruptcy case.
This reality can make for delicate timing for when to file a bankruptcy case if you and/or your spouse have ongoing medical conditions and are expecting to have significant future medical expenses that you will not be able to pay. 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 given your circumstances.