Dealing with a Bankruptcy in Your Senior Years
Bankruptcies are painful at any age, including late in life. The aftermath of a bankruptcy isn’t as bad as many may think, and considerably less so for people already in retirement.
Declaring a bankruptcy in itself isn’t a negative thing, and in fact this is a solution to a problem and not a problem in itself. Being bankrupt is the actual problem, where we cannot manage to pay back what we owe, and bankruptcy laws allow us to seek closure on this debt by having it written off and providing us a fresh start financially.
While we generally do not choose to become bankrupt, at least deliberately, once we become financially insolvent, where we lose the capacity to keep up with our debt obligations, we do get to choose whether we declare bankruptcy or not.
Some people are confused about this and see declaring bankruptcy as making the situation worse rather than better, and may hesitate to avail themselves of the protections available by way of bankruptcy law. We want to avoid needing to do this, but if we need it and refrain from declaring bankruptcy, we take a bad situation and refuse to rectify it.
We may feel bad for our creditors, but we need to realize that this money is loaned out with the expectation of risk, which is priced into our rate. Some loans don’t get paid back, and if we are concerned with the moral aspect of this, we can view declaring bankruptcy as taking advantage of insurance that is available to us, with the cost of the insurance being paid for by way of the interest that we pay, and sometimes you just need to make a claim.
The potential for our declaring bankruptcy and forcing our creditors to write off our debt is not lost on lenders, and while neither the lender nor the borrower welcomes a situation where we lose the capacity, if it does come to that, we want to make sure that we keep a clear head and take advantage of this protection when it benefits us to do so.
If you have disability insurance and get injured and can no longer work, this may or may not have been your fault, but regardless, you can’t work anymore. No one wants to be on disability but sometimes this is needed, and we aren’t expected to refuse the protection and struggle even more financially. Bankruptcy protection is similar to this, where we don’t want to be bankrupt, but we are, and it can be in our best interests to take advantage of this insurance.
Declaring bankruptcy isn’t a pleasant thing at all though, even though it may take us from a less pleasant situation to a more manageable one. We do want to do our best to try to get our ship back on course but when it sinks, you only have the lifeboats available and it’s just better to jump on one than drown.
We may resent the degree of supervision from a trustee that comes with taking advantage of this, but this is a matter of what will produce the least pain, and as demoralizing as it is to have us treated like a child may be, there are worse things, and not getting any help is usually worse.
We may think that declaring bankruptcy will harm our credit for years, and while this is true, it’s the defaults that do the harm actually, and it’s easier to recover your credit by declaring bankruptcy than by sitting back and letting the judgements pile up against us. These judgements have real teeth and can bite into you when you are already lying on the ground trying to get up.
Turning Down Help in a Time of Need Isn’t Wise
Bankruptcy protection is designed to limit the amount of damage that being insolvent can bring on, and it is always foolish to refuse this help when it would actually be helpful to us. The first step here is to accept what has happened and not dwell on it too much, apart from the lessons that this should be teaching us, and look to do our best to recover.
It does take quite a while to fully recover from a bankruptcy, but we will get there faster if we try our best, and this very often includes the declaration of it. If the insolvency has been even partly our fault, recovering doesn’t just mean wiping out debts and rebuilding our credit, as learning to manage our finances better is a big part of this as well. Without this, we can easily be right back in bankruptcy, and if the only thing saving us from this is our inability to borrow, once we recover this, we may be right back in the pit again.
Becoming bankrupt later in life, especially as a senior, presents some additional considerations, especially if our income is limited. We may not have enough income for it to ever be wise to borrow again for instance, although we may already have proven ourselves to tend more toward acting unwisely. Like an inmate who gets released, there is a real risk of going back to a life of crime, and this is a particular risk with people who become bankrupt.
This is not to say that a bankruptcy is always your fault, as unfortunate circumstances can arise that simply cannot be met, such as losing your job or having unforeseen major expenses throw us to the ground. There is usually a degree of culpability involved though, and these situations are always made worse by poor financial management. There is always something we could have done differently to at least reduce the amount of financial hardship that we became faced with.
Reflecting on this can’t change the past but it sure can change the future. We should never reflect upon the past beyond seeking lessons to allow for positive change, although when it comes to financial management, there are usually quite a few lessons that can be learned.
We may feel less empowered if we face insolvency in our golden years, and if we are retired, we may rightly think that recovering may be easier for those still working, but we need to realize that this higher capacity becomes offset by their higher needs, as older people have less needs generally. If we can tighten our ship more than they can, this is an advantage as well, and people in retirement require tighter ships since they tend to have less discretionary income and this can even serve to require us to right things where we may not have if not for being so challenged.
Not having access to credit can be the best thing that can happen to some people, and if you can’t realistically afford to borrow, you should not be borrowing. Believe it or not, one can survive quite well without credit, and credit makes more sense if your income is increasing and you are looking to leverage that higher income now, and not so much when you are on a fixed income.
Seniors need to be very careful about their borrowing in fact, much more than younger people are. The risk with a bankruptcy with seniors isn’t the bankruptcy itself or recovering from it, and it is not the loss of credit that occurs, it is the risk of screwing this all up again, and that’s the risk that is higher with older people in financial trouble due to the combination of their more limited capacity together with a willingness of lenders to allow them to well exceed it.
Regardless of the reason for the bankruptcy, it demonstrates a lack of ability of some sort to manage credit, and this is the case even if it is due to a job loss of no fault of your own. Not preparing for this adequately is still something we need to take some responsibility for, rather than to blame bad luck where we were ill-prepared for the roll of the dice that took us down.
Ironically, people often do not survive these situations because they have too little access to credit instead of too much. We should be saving up for these things, but with more credit, we at least have more access to the cash we need to keep things more together during these periods, we may be able to survive them and recover once we’re back to work.
Not saving enough is the biggest mistake though, even though in some situations such as with medical care needed to save our life, this may not be enough. There is usually more discretion in decisions involving major expenses than we may realize, and we have to approach these things honestly and deliberately instead of just reacting and spending like many people do.
While we are under the direction of a bankruptcy trustee, they generally will be reasonable in allowing us to not be too uncomfortable during this phase, and once we’re discharged, we do get a clean start.
Since Seniors Need Credit Less, Losing it Will Mean Less, and is a Good Idea in Most Cases
The big problem that bankruptcies cause is the restrictions on borrowing that this causes during the recovery phase, until such a time as one can rebuild one’s credit sufficiently. We’re also told that bankruptcy is more of an issue with seniors, and this is the prevailing belief, because seniors have less time to work with.
It is true that someone who is 30 and spends a few years as a credit outcast will spend a much lower percentage of their remaining years on the outside looking in, versus someone in their 70’s. This can be for the rest of the journey if you are old enough.
Older people also tend to have lower incomes and no real potential for income growth and this can also be seen as presenting a greater obstacle. This is the constant though and if we are forced to do the right thing more that’s actually a good thing not a bad one or a worse one. Older people are more financially challenged overall but this actually makes remediation of their credit less of an issue, because they need to be relying on credit less and in many cases not at all.
If our means is more modest and we are forced to live within our means, this isn’t more of a problem, it’s actually more needed. Elderly people are under less risk when bankrupt because there is less need for credit at this stage of your life, or there at least should be less, and this means that the price that will be paid will be less and perhaps considerably less than with those who rely more substantially on credit.
We are told though that credit is very important to seniors, to be able to do such things as rent a car or book a hotel room, as well as with buying a car. You don’t need credit at all to get a credit card as a few hundred dollars’ deposit is all you need with secured credit cards, and they work identically well in booking hotel rooms and such.
Getting a loan to buy a car is another matter though, and you do need credit for that, but so does anyone who has lost their credit, regardless of age. It is certainly true that once you’ve retired, you need a car less, and perhaps even more importantly, you drive so much less now that an older car may do just fine and give you years of reliable service, which we may be able to get without borrowing.
We don’t talk much about how less important credit is in our golden years, although needing it and wanting it are different things. We see a lot of older people borrowing as much as people will lend them, and this is a time in our lives where we need to be particularly careful of borrowing. We may just be getting by or close to it and adding a significant amount of extra cost by way of interest payments is often the last thing we need at this stage.
No one should ever want to become insolvent, and most could do a much better job of managing this risk, but if this happens to us as a senior, we need to understand that even though we’re told that it’s a bigger deal for us, it’s actually less of a deal, but still is one that needs to be carefully managed.
Given that our crime is mismanaging credit, we should not be so eager or even so desperate to regain this ability. This is not just the hair of the dog that bit you, it’s the actual dog, and it bears to keep in mind that if we are at least not more careful next time, it will bite us again.
The goal for the great majority of seniors should not be to regain credit as soon as possible if we lose it, it should be to do our best to avoid it in all cases, and actually live within our means at a time where this becomes more important than ever.
Editor, MarketReview.com
Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.
Contact Robert: robert@marketreview.com
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