Debt Relief Options for Senior Citizens
Your golden years are a time to step out of the workforce, take time for yourself and enjoy the fruits of your labor. But empty nesters, it turns out, are saddled with more debt than ever before — and that increasing debt is threatening their retirement nest eggs.
Among households headed by someone 75 and up, the average debt in 2016 landed at over $36,700, according to new data put out by the Employee Benefit Research Institute, which is a 21% uptick from 2010. Similarly, debt among heads of households who are 55 and up skyrocketed from 53.8% in 1992 to a whopping 68% in 2016.
The primary sources of income for most seniors are retirement savings and Social Security, but financial longevity has everything to do with expenses. In other words, older folks whose income is being eaten up by debt may be more likely to outlive their money.
So where is the debt coming from? Surprisingly, student loans are a leading culprit. Between 2005 and 2015, this kind of debt quadrupled among consumers 60 and over, according to the Consumer Financial Protection Bureau.
“A lot of older folks ended up helping children and grandchildren who were unlucky enough to graduate during the financial crisis, so they’re picking up the pieces on their behalf,” Jill Schlesinger, CFP and senior CFP Board ambassador, told LendingTree.
These numbers are more of a microdata point of a larger trend — older Americans helping to support adult children. One 2015 Pew Research Center survey found that roughly 60% of U.S. parents with adult children had helped out financially during the preceding year.
If a senior you care about is burdened with debt, there’s still time to course correct. While you may not be able to unring the bell entirely, you can help them take steps to manage their debt a little better.
Options for senior citizens to pay down credit card debt
Keeping a careful budget
Your income fluctuates a lot less during retirement, with Social Security making up the bulk of the incoming money — over 90% for elderly beneficiaries, according to the Social Security Administration. But the average monthly payment is only about $1,400. That’s the equivalent of a $16,800 annual salary.
Since stretching your money comes down to two main components (income and expenses), senior citizens with debt should give their spending the attention it deserves. This begins with tracking spending to get the most accurate idea of where your money is going. Debt payments aside, how are you tackling your basic living expenses?
To create an effective budget, begin by listing out all your income and expenses. Then make a financial plan of attack that feels right to you. If heavy debt payments tip the scales so that your expenses outweigh your income, it might be wise to explore debt relief organizations for seniors. (More on this shortly.)
If a debt is really pushing your cash flow, picking up part-time work, if that’s possible, is one way to make up the difference.
Delaying when you collect Social Security can also help even the financial playing field. Holding out until you’re 67, which is considered full retirement age, means getting considerably more than if you’d begun taking the benefit at 62.
Revamping your budget may reveal areas of your financial life that need a little fine-tuning. Are you living beyond your means? If, for example, you’re spending $100 a week at restaurants, getting in the habit of meal planning and grocery shopping can easily even things out.
If you’re up against a high car payment, selling or going with an older model or foregoing a car altogether, and relying on public transportation may be a more cost-effective approach. The U.S. Department of Energy is one of the sponsors behind the Ride or Drive calculator, which helps people figure out if ride-sharing apps like Uber and Lyft are actually cheaper than owning a car. Eliminating your car payment, insurance bill, gas and maintenance fees in one fell swoop could very well transform your budget.
However, when seniors hear the term “downsizing,” housing is typically the first thing to come to mind. This can be hard because Schlesinger said “it often requires making a huge change to your lifestyle” at a time when you probably just want to sit back and enjoy. What’s more, selling the big house and moving to a one-bedroom condo won’t necessarily be cheaper.
“Most have condo association fees, and the ones that have all the nice bells and whistles and are much better to age in actually cost a lot of money,” said Schlesinger, adding that downsizing may also require moving away from loved ones and caretakers.
She suggests starting with smaller lifestyle tweaks. Maybe keeping up on your debt payments just means taking one vacation a year instead of three, or dialing back the amount of financial support you extend to adult children. Look at your spending and see where you can free up more money for debt.
There are a number of simple, do-it-yourself ways to consolidate debt, which will ultimately help you get debt-free faster and save money over the long haul. Many seniors do so by leveraging their home.
Enter the reverse mortgage. To qualify for a reverse mortgage, you have to be at least 62 years old, have substantial equity in your home and have the ability to keep up with things like property taxes and insurance premiums during the loan process. (Click here for a full breakdown of reverse mortgages.)
Think of a reverse mortgage as a home equity loan that you don’t have to pay back monthly. Instead, the loan comes due at the time of the last surviving borrower’s death, or when that person sells the home or stops using it as their primary residence. Upon your death, if your heirs don’t have the money to pay off the loan, they can sell the home and use the proceeds to close a reverse mortgage. According to the Consumer Financial Protection Bureau, they don’t have to pay the difference if the loan balance exceeds the home’s worth.
Just be careful before you decide to go with a reverse mortgage, as they can be dangerous products for seniors and are susceptible to abusive practices.
Another option to tackle debt is to use a home equity loan, which doles out a lump sum of cash that you then repay in equal installments. The same goes for a home equity line of credit (HELOC). This is a revolving line of credit that you begin repaying after you’re done borrowing. Both let you use the equity you have in your home to unlock cash. To get the best rate, your mortgage debt generally has to be 85% or less of your home’s value. Also, your debt-to-income ratio (aka the percentage of your income that’s currently going toward debt payments) typically can’t exceed 45%.
If you don’t have enough equity to borrow against your home, a personal loan might be the answer. This is when a lender gives you a one-time loan that you have to repay in equal installments over a specified period of time at a fixed interest rate. If the rate is lower than what you’re paying on your current debt, you’ll end up saving money in the long run. You’ll also have the convenience of making just one monthly payment.
Another way to consolidate debt is with balance transfer offers. This is when you use a new credit card — one that has a low or 0% introductory interest rate — to pay off your existing debt. For it to make financial sense, you’ll have to pay off the balance before that promotional period ends to avoid getting slammed with interest.
No matter which debt consolidation option you choose, a good credit score will help you get the most competitive rates and terms. If this is an issue, borrowing privately from a family member or friend may be a viable alternative.
Bankruptcy is freighted with stigma and negative connotations, but for seniors buried under debt, it’s sometimes the only option. Chapter 7 bankruptcy liquidates some of your assets in order to make good on your debts. In the majority of cases, your debts will then be discharged. (FYI, alimony, child support, and most student loans, among other things, will not be forgiven.)
Your credit score will suffer in the short term, and the bankruptcy will show up on your credit report for 10 years, but you can still rebuild your credit. And while some of your assets are up for grabs, your retirement accounts are off limits. It’s also likely that you’ll be able to retain a portion of your home equity.
Chapter 13 bankruptcy puts a repayment plan in place that generally lasts three years, after which your remaining debts are discharged. The good news here is that your assets are safe. This type of bankruptcy also halts foreclosure proceedings. This in itself could help you save a home that’s on the brink of foreclosure. One downside, though, is that the bankruptcy will stay on your credit report for up to 10 years. (Click here for a comprehensive bankruptcy breakdown.)
While filing for bankruptcy impacts future financing, this may not be that big of a deal for someone in advanced age. Getting a fresh financial start, while being able to keep their home and retirement accounts safe, may be the most appealing option for seniors in debt.
One other thing worth mentioning: If you don’t opt for bankruptcy, debts like credit card bills, private loans, and car notes will not be left to your heirs. Instead, your estate will be used to pay these creditors. In this way, your surviving relatives will get less of an inheritance, but they won’t have to formally assume any debt. As for public student loans, these are actually forgiven upon your death.
Debt relief resources for seniors
If the above tactics aren’t doing enough to move the needle on debt, all hope isn’t lost. There are a number of organizations out there to help seniors manage their open accounts. A nonprofit credit counseling agency, which begins the relationship with a comprehensive financial review, is one of the best places to start. From there, they’ll offer customized advice that’s sometimes all that’s needed to get the person on the right track and feeling empowered.
In extreme cases, the person may opt into a debt management program. This is when the credit counselor takes it a step further, negotiating lower fees and interest rates on the debtors’ behalf for a nominal monthly fee, typically $25 to $35. The person then makes debt payments to the counselor, who pays the debt collectors. A couple of catches: only unsecured debts apply (credit cards, personal loans, etc.), and to be eligible, the person must have a steady stream of reliable income.
When researching credit counselors, focus on nonprofits, which uphold rigorous standards when it comes to protecting consumers. Also look for organizations that are backed by the National Foundation for Credit Counseling and Council on Accreditation.
Government programs for seniors
If money is tight, seniors with debt may qualify for state-sponsored assistance with paying their Medicare premiums, deductibles, copayments and more. Eligibility for Medicare Savings Programs vary from state to state; check here to connect with your state regarding specific requirements.
The Administration on Aging (AoA), backed by the U.S. Department of Health and Human Services, is another organization worth looking into. Designed specifically to protect the well-being of older Americans, the AoA offers support and resources around things like long-term care assistance, nutrition and wellness, health insurance and medical needs, among other things — including legal aid to help protect against financial exploitation. This may be especially valuable for seniors who are being harassed by creditors. The good news is that according to the Consumer Financial Protection Bureau, Social Security benefits that are directly deposited into your bank account cannot be garnished by debt collectors.
When to take over your parents’ finances
Having an open and honest conversation with your folks about money isn’t always easy, but getting a sense of how they’re doing financially is no small thing. According to the Center for Retirement Research at Boston College, mild cognitive impairment is widespread among people in their 70s and 80s — and it can majorly cloud financial judgment.
It stands to reason that broaching the topic when your parents are in their 70s isn’t a bad idea. Schlesinger suggests bringing up the topic of money in a gentle way in order to get a general sense of how they’re doing. Have they given any thought to estate planning? Have they updated their wills? Is their financial plan built to last through retirement?
“If your parents are pushing back, don’t fight them,” she said. “If you’re getting a sense that they need some help, you can invite them to meet your financial planner, or they can find one of their own at LetsMakeAPlan.org.”
As their age advances and cognition declines, they may be open to giving you power of attorney over their finances. This grants you the legal authority to manage their bank accounts and make financial decisions on their behalf, which is also a solid safeguard against elder fraud.
Some parting thoughts
More seniors today are carrying debt than ever before, heading into their golden years further in the red than previous generations. It is possible to course correct, though. Establishing a realistic budget and making lifestyle tweaks can go a long way, as can debt consolidation. In extreme cases, bankruptcy is the best route.
Senior citizens with debt have plenty of resources at their fingertips, from nonprofit credit counseling to free government programs. Either way, keeping the financial lines of communication open between you and your parents is the best way forward.