Bankruptcies Soar among the Elderly

While the number of people 65 and older filing for bankruptcy skyrockets, some experts say it could be worse.

Like everyone else, the elderly are feeling the effects of the ongoing recession and slow recovery.

In 2009, an estimated 1.7 million people filed for bankruptcy and a record number of those bankruptcies were seniors aged 65 or older. According to AARP, the rate of personal bankruptcy filings among those at least 65 years old grew by 125 percent since 2007, while the bankruptcy rate for seniors ages 75 to 84 jumped a stunning 433.3 percent.

These numbers represent hundreds of thousands of individuals who for a number of reasons, including the declining economy, lack of retirement savings and the increasing cost of health care, have had to file for protection from creditors. The figures aren’t expected to ease much as the slow economy continues to ravage investments and savings and leave the elderly with less of a nest egg than they had expected.

Ironically, there is a growing concern that, even with the soaring number of Americans filing for bankruptcy, the number should actually be much higher. Experts say that Americans who need bankruptcy protection worry they won’t get any benefit from it or simply cannot afford to file, so they are avoiding it. This hurts everyone because it can hinder the economic turnaround.

These debt-laden Americans, including many seniors, have gone into a "shadow economy," or informal bankruptcy, according to some experts. In this informal bankruptcy, indebted consumers just stop paying their creditors.

The signs include a rising bank card loan default rate, a skyrocketing student loan default rate and people continuing to walk away from their homes.

Bankruptcy laws changed in 2005 because filings skyrocketed and credit card companies and banks wanted to weed out deadbeat borrowers. The law made it harder by making it more expensive and more restrictive for individuals to file Chapter 7 bankruptcy, which erases most debts.

Pay Now or Pay Later

So, why are seniors putting off filing for bankruptcy? One reason may be that it’s expensive to file. Attorney and filing fees have risen, and under the new law passed in 2005 additional forms, paperwork and attorney liability have added to the cost. In the first two years after the law changed, the attorney fees for filing Chapter 7 bankruptcy rose from $712 to $1,078, according to a study by the U.S. Government Accountability Office. And the filing fees increased from $209 to $299.

Some observers say that many debtors have no choice but to delay filing for bankruptcy. Some debtors wait until they receive a tax refund, and others cash out their retirement savings to pay for a lawyer.

Also, the bankruptcy system is not just more costly, it is more complex. It requires pre-bankruptcy credit counseling. It requires six months of income information and two years of tax returns. And if the debtor holds off filing, a lawyer has to continue to gather new information.

Another reason to postpone filing for bankruptcy is that many Americans are trying to save their homes. Under the bankruptcy law, filers cannot protect their primary residence from creditors.

Even with all the new complexity, experts still say postponing filing is not good for debtors. It's similar to delaying going to the doctor, because you'll just end up with more problems, they say. It turns out the longer a senior citizen, for instance, waits to file bankruptcy protection, the more it will cost them.

Also, recent changes to the bankruptcy laws have eased some of the fears of losing one’s home. In the past, homeowners who applied for loan modifications could have been turned down if they filed for bankruptcy. But now, a debtor who wants loan modification cannot be discriminated against because they have filed for bankruptcy. Unfortunately, because of the slow pace of loan modification, this change in the law hasn’t affected too many homeowners yet.

While hope springs eternal, most financial experts say that any hope for changes to the current bankruptcy laws appears remote. It appears the best hope for the ranks of seniors near bankruptcy at the moment is a reinvigorated economy.