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Study finds five-fold bankruptcy increase for older Americans

Is it wise for older Americans to file for bankruptcy?

The overall rate of bankruptcy in the United States has decreased. The most recently available data shows 789,000 bankruptcy filings in 2010 compared to over 1.6 million petitions for relief in 2010. Although this decrease is promising, a closer look shows a concerning trend: the rate of bankruptcy filings for older Americans is increasing.

The increase is significant. According to the recent study Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society, available on the Social Science Resource Network, Americans aged 65 and older are two times more likely to file for relief through bankruptcy compared to their counterparts in 1991. The study also found a five-fold increase in the percentage of older Americans currently in the bankruptcy system in the United States.

Why the increase in bankruptcy for older Americans? Researchers point to various reasons for this increase. First, they note the safety net often relied upon by older Americans comprised of social security and pensions have decreased in the last few decades. This paired with increased health care costs leads to a financial burden that can become overwhelming.

How does bankruptcy impact retirement? These individuals are generally preparing for or already in retirement. This results in unique financial considerations. The full impact will depend on the form of bankruptcy relief chosen by the petitioner. A Chapter 7 bankruptcy generally leads to the liquidation of certain assets to pay off creditors while a Chapter 13 results in a repayment plan scheduled over a three to five-year period. In most cases, federal laws protect retirement assets during bankruptcy.

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) offers protection, but there are some exceptions. For example, the Internal Revenue Service (IRS) may be able to access retirement funds to pay off tax debt. The level of protection available also depends on the type of retirement account. For example, federal law protects the funds placed in IRAs to a certain limit – currently set at almost $1.3 million and adjusted on a three-year cycle for inflation.

Pensions can also qualify for protection during bankruptcy. This can include government sponsored retirement plans, deferred compensation plans and controlled group retirement plans that were provided through business partnerships, churches, the government or proprietorships.

Older Americans should also note creditors may be able to reach retirement assets when the owner is taking distributions. This can occur when the owner receives a distribution that is more than needed to meet his or her living expenses.

Should I consider bankruptcy? A petition for relief through bankruptcy can be a smart move for future financial security. This decision requires a careful review of the benefits and risks in each individual situation. Contact an attorney to discuss your concerns.