Life Lines for Seniors Drowning in Debt

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When 93-year-old Clara Watkins’ air conditioner broke down in a 100-degree Texas heat wave three years ago, she obtained a home equity loan to purchase a new unit. At the same time, says her 58-year-old granddaughter Sheridan Walker, the septic tank needed to be replaced, as did her grandmother’s 19-year-old car.

“It was all things that were needed,” says Walker, who has taken care of her grandmother for the past 10 years. “Part of the home equity loan was also paying off previous credit card debt,” she added.

The two women live on combined pension and Social Security receipts totaling nearly $3,000, but with more than $160,000 in debt and a $1,400 payment on the home equity loan, they are part of a growing group of older Americans struggling to manage their debt.

Watkins enlisted the services of a debt relief company to help, but her granddaughter says the company is charging her $5,000 in fees before they will start sending anything to her creditors. Meanwhile her costs continue to rise as she tries to meet her basic needs.

“Seniors typically go into debt on things they cannot avoid spending money on,” says Joel Ohman, a Tampa, Fla.-based certified financial planner and founder of the credit card comparison website, CreditCardChaser.com. “While people who are in their 20s may charge things frivolously, seniors are purchasing things they need.”

The Plastic Net Survey, conducted by the non-partisan public policy research organization Demos, showed that the average indebtedness of households headed by those 65 and older in 2008 rose to $10,235 from $9,827 in 2005. Of that, nearly $4,000 was attributed to medical debt.

To compound the problem, much of that debt is held on credit cards that charge a high amount of interest. According to a survey of consumer finances conducted by the Federal Reserve in 2009, 37% of households headed by someone between 65 and 74 now carry credit card debt.

Additionally, a Consumer Bankruptcy Project Study conducted by AARP in 2007 showed that the number of seniors seeking relief for that debt through bankruptcy also rose. In 1991, only 8.2% of people filing for bankruptcy were 55 and older. By 2007, that number had grown to 22.3%. “These are the last hard statistics we have,” says Jean Setzfand, director of financial security for AARP in Washington, D.C. “But they most likely have only increased during the recession.”

Today’s seniors are faced with more complex retirement income schemes than before, adds Setzfand. “In years past, seniors’ Social Security was the first line for retirement and the second line of their retirement was a guaranteed income through a pension,” she says. “Pensions have all but disappeared for most people. Today, seniors have an open market retirement plan and they have to figure out how to manage their money and pay themselves.”

The Life Lines

While the situation may seem hopeless, if you’re retired and in credit card debt, or you’re taking care of a senior in debt, there are things that can be done to help the situation.

Ty J. Young, president and CEO of Atlanta-based wealth management firm Ty J. Young, Inc., says the first thing you should do is plan for retirement and ensure you have the nest egg in place that will allow you to live the lifestyle you want. “You need to figure out what it will take you to live and if you’re not there, you might need to work a little longer or figure out how to live on less,” says Young.

If you’re already retired and finding it difficult to live on income from Social Security, pension and retirement accounts while paying off credit card debt, those who own their homes may be wise to investigate a reverse mortgage, which pays seniors a lump sum or monthly payment based on the value of the home. “A financial tool that’s widely underused is the reverse mortgage,” Young says. “When someone is 70 or 80 years old and they cannot buy food or medicine, but they’re sitting on a house that’s paid for, a reverse mortgage can change everything for them.”

The upside, Young says, is that if you find a legitimate company for the reverse mortgage, you can draw an income and stay in your home. There are serious downsides, though, both for you and your heirs. High closing costs will take a lot of money up front, and the house may no longer be a part of your children’s inheritance.

Young says seniors must also sometimes make hard choices about spending, which may include cutting up credit cards. “People must absolutely get their cash flow under control and get back to a set budget. There’s no magic bullet, it takes hard work to control spending,” he says.

Walker admits the first mistake her grandmother made was taking out the home equity loan to pay off debt. “Now she runs the chance of losing her home too,” says Walker. The next mistake, she says, was keeping the credit cards open after her grandmother paid off the previous bills with part of the home equity loan proceeds. “We said we weren’t going to use them anymore, but we didn’t have enough to pay living expenses after the loan.”

Walker herself doesn’t work, as she says her grandmother’s health makes it impossible for her to be left alone. “I would love to find something I could do from home,” Walker says.

Getting a part-time job or finding ways to earn extra money should be an option for many, says CreditCardChaser’s Ohman. “The absolute last case options should be to tap into retirement or into long-term assets to pay off debt,” he says. “If there’s a way to bite the bullet, take a part-time job for a year or two and pay off debt with that.”

The next step may be credit counseling, says Setzfand of AARP, who recommends a nonprofit agency through the National Foundation for Credit Counseling. “People need to evaluate a service and make sure they are dealing with a credible agency that is working to lower interest rates and not charging a large fee before paying their creditors,” she says.

The last resort could be to file for bankruptcy. Charles Chesnutt, a bankruptcy attorney in Dallas, says that while Social Security is always protected from garnishment and most long-term assets such as homes and retirement are sometimes protected from unsecured creditors, some seniors may choose to file for bankruptcy to protect their estates.

“There may be a temptation not to file bankruptcy,” says Chesnutt. “But if they don’t file, their children may have to pay the debts later with the proceeds from the estate.”

Chesnutt empathizes with seniors who feel they must incur debt to pay living expenses. Still, he cautions seniors to think before pulling out the plastic. “One thing I tell seniors to think about each time they swipe that card is that they’re taking a bank loan. I tell them, ‘Remember, you’re putting all of your personal property at risk if you can’t pay it back. Use cash when you can.”

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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