Debt gaining on many U.S. seniors
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1. Seek professional
help. A reputable, nonprofit consumer counseling service
can help negotiate lower payment plans and deal with creditors.
You can find one through the National
Foundation for Credit Counseling. Be wary of any pro who promises
to abolish debts or who demands fees for service.
2. Be wary of
reverse mortgages. A counselor may recommend a reverse
mortgage for homeowners who don't have enough cash to pay bills,
says Tawyna Walters, home equity mortgage counselor at Consumer
Credit Counseling Service of Greater Dallas.
A reverse mortgage is a loan against your home that doesn't have to be paid back as long as you live in it. You get cash either at once, in various payments or as a line of credit you can access.
They aren't for everyone.
"The benefit of a reverse mortgage is that it turns their equity into cash and they can continue living in their home," says Walters. "But the downside is that it can be expensive since they're still responsible for paying taxes, insurance and maintenance on the house."
You also must be 62, and if you have an unpaid mortgage, that balance must be paid by the loan. Again, a counselor can help you review all options thoroughly.
3. Refinance at your own risk. Refinancing exposes seniors on fixed incomes to the risk of foreclosure if they're unable to pay the new mortgage.
4. Stand your ground. On the other hand, seniors with unsecured debts, such as credit card bills, have more rights and opportunities to protect themselves, says McConnell. The burden of proof is on collectors who must first go to court to get their money.
"For unsecured debt, there are tremendous costs to going to court, so the likelihood will be small that they'll do that," she says. "Then they have to submit evidence against you. If they can't prove the debt is yours, they don't win. But I can guarantee that if you have a mortgage and you default, no one will let you stay in that house."
The upshot: It's often far worse to refinance to
pay off credit cards than go to court.
5. Don't deplete
retirement funds. Assets in employer-sponsored retirement
plans such as 401(k)s -- as well as IRAs in some states
-- are protected against creditors by state and federal laws. That's
why cashing out retirement funds is a huge mistake. Once that happens,
assets can be seized.
Now for some fine print: Protection for retirement
plans varies depending on where you live, the kind of retirement
account you have and if you're in the process of paying off creditors
or have actually filed for bankruptcy. Roughly half of states have
some safeguards for IRAs during the debt collections process. When
someone files for bankruptcy, though, new federal laws protect IRAs,
SEPs and SIMPLE IRAs up to $1 million in all states, says Michael
Kitces, director of financial planning at Pinnacle Advisory Group
in Columbia, Md.
6. Get legal help. Indeed, if paying debts becomes too onerous, see an attorney with knowledge in bankruptcy protection to help get rid of debt without putting your home or other assets at risk, says Kitces.
"If you choose bankruptcy, you may protect your IRA but you may have to sell your home. So talk to an attorney," says Kitces.
Having no money can be as complicated as having a lot of it. So when faced with debts, consider seeing a lawyer to help determine the best option.
There's free legal advice for seniors in every state.
Find help near you through the American Bar Association's Commission
on Law & Aging directory.
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