Here's a retirement planning rule: Before you retire, get out of debt, then use your credit cards carefully.
A rising number of people over 65 are going bankrupt, with the percentage going steadily upward from 2 percent in 1991 to 4 percent in 2001 to 7 percent in 2007 -- before the financial meltdown in 2008, according to a study by University of Michigan Law School Professor John Pottow.
The statistics come from information gathered by a consortium of academics known as the Consumer Bankruptcy Project, or CBP. Pottow analyzed these numbers for answers about what causes bankruptcy among older people. As he puts it, "These findings are both striking and ominous."
More than 66 percent of elder people who filed for bankruptcy blamed credit cards for their problems. Debtors older than 65 had a median of $22,562 in credit card debt, much more than younger debtors who had a median of $13,615. Why? Pottow cites four reasons:
- Vulnerability. Older debtors were more likely to be misled or even deliberately defrauded.
- Lack of credit management sophistication. Younger debtors were much more likely than older ones to ask their lender, a charity or family members for help and/or forgiveness of part of the debt.
- Too generous. In 23 percent of the cases, older debtors had tried to help a family member or friend get out of debt and were pulled down themselves.
- Alone. Nearly 70 percent of older debtors said they felt isolated and reluctant to tell anyone about their debt. Compared to the general population of the same age, they tended to be unmarried and living by themselves.
Where did the credit card debt come from? Nearly 60 percent of debtors over 65 said they got into trouble because of medical bills. Pottow pointed out that almost all of these people were eligible for Medicare, but it apparently wasn't enough.
He concluded three things from his study that anyone living in retirement should take to heart:
- Putting something on a credit card and paying the minimum may seem like an answer, but it's not.
- It's easy to let your family's financial problems drag you down. Using your credit to help somebody else out is often a very bad idea.
- If you can't pay your medical bills, look for help before you get in too deep.
What happens to people after they declare bankruptcy? About 40 percent were still struggling with medical bills after they filed for bankruptcy. More than 30 percent said they went back to work.
As one respondent says, "It's hard out here at 71 trying to make a living. Hope you don't have to file bankruptcy at 71 and still try to work."