Society of Certified Senior Advisors: Senior Debt Relief: Comprehensive Guide to Programs for Retirees

According to the U.S. Government Accountability Office (U.S. GAO), the share of older families with debt and their debt has significantly grown over the last few decades. This puts a considerable strain on households often living on a fixed income.

Young people might have ample time to pay off debts before retirement. So, they must look into a few debt relief options rather than bankruptcy. As a senior, making debt payments might be difficult after paying for your everyday living costs. So, don't take funds out of your retirement account until you've considered these other choices first.

Here are the prime debt relief options for older adults:

Downsize your home

You might want to move into a smaller home and be able to sell some of the things in your current house. The money you get can be used to pay off some of your debt.

Per a study conducted by Merrill Lynch, an American investment management and wealth management division of Bank of America, and Age Wave, "Roughly 51 percent of retirees ages 50 and over move into smaller homes after retirement."

Smaller homes also have lower costs, like smaller mortgage or rent payments, lower utility bills, and less upkeep. Getting rid of some costs can stop you from accumulating more debt and give you more money in your budget to put toward the debt you already carry.

Create a budget

When it comes to getting out of debt as an older person, creating a good budget is a great place to get started for two reasons.

First, a reasonable budget will show you where your money is going and where most of your debt comes from. Some types of buying are easy to cut back on, ensuring no more debt is taken on.

Second, you can determine how much money you have to pay off your debt. This is an excellent place to start when making a plan that will work. Or you might find out there isn't enough money so that you can look for other earning options.

Sign up for credit counseling

Credit counseling can be a great way to get help if you have outstanding debt issues.

A credit counselor can assist you in making a budget, looking over your credit record, and making a plan for dealing with your debt. You can almost always start with a free session, but some services that are part of your plan may cost money.

The Financial Counseling Association of America (FCAA) and the National Foundation for Credit Counseling (NFCC) are both non-profit groups that can help you find a good credit counselor.

Enroll in a debt management program

Nonprofit credit counseling agencies help with many financial issues, including debts. Your counselor will review your funds and suggest a debt management plan. They will assist you in enrolling in a debt management program that might benefit you in the following ways:

Get a plan for how you will pay off your debt in three to five years.
Combine the payments for several credit accounts and loans into one monthly payment.
Your creditors may lower your interest rates or your monthly payments.
As you pay down your debts, your credit scores may go up.
During the payoff process, you get information and help from professionals.

Consolidate your debt

Debt consolidation means putting all your bills into a single loan. It won't eliminate your debt instantly, but it could lower your monthly payments, reduce the time it takes to pay it off, lower your interest rate, or make it easier to deal with.

There are many ways to consolidate senior unpaid debt:

Debt consolidation loans: Most of the time, a debt consolidation loan is a personal loan you use to pay off bills. If you have good credit, you might be able to get a loan with a lower interest rate than what you're paying now. This could save you money and help you pay off your debt faster. Personal loans are also unsecured debts, meaning you won't lose your house or other property if you can't repay the loan. But if you don't have good credit, you might not be able to get a lower interest rate or even a personal loan. There are fees to pay upfront, which could compensate for any interest savings.
Balance transfer credit cards: If you're having trouble paying off your unpaid debts, especially credit card balances, a balance transfer credit card with 0% APR could help you by lowering your interest rate. These cards can give you 0% interest for up to 21 months, allowing you time to devise a plan for paying off the debt and then making your payments, which go for 100% towards paying it off. Most balance transfer cards are tailored for people with good to excellent credit. Some also charge fees to transfer balances, and some have annual fees. Once the 0% interest period is over, the company may charge high-interest rates on fresh purchases and the existing balance.
Home equity: If you have a lot of equity in your home, which means that the value of your home is more than what you owe on it, you can use that equity in several ways to help pay your bills or pay off more debts. All of the choices below can help you lower your interest rate or use the value of your home to get funds. But you could lose your home if you can't keep up with your payments.

Home equity loan: A home equity loan is like a second mortgage on your home. It has a fixed interest rate, so this option suits seniors with a fixed income and monthly spending plan.
Home equity line of credit (HELOC): A HELOC or home equity line of credit will give you access to credit that can be used when required, can be paid back, and used again. The home will be considered as collateral.
Cash-out refinance: With a cash-out refinance, you get a bigger loan than you already have on your home. You get the difference between the two in cash, which can be used for any purpose, especially for paying off debts. The interest rate is lower than other home equity loans. Still, you can usually only borrow up to 80% of your home's value.
Reverse mortgage: With a reverse mortgage, you can borrow more as you get older, which can be very helpful for older people. With a reverse mortgage, the investor can give you a lump sum or monthly payments every month. You must repay the loan when you no longer live in the house.

Settle your debts

You may negotiate with your creditors and make payments less than what you owe. You may discuss the terms of your debt, like the balance, interest rate, and fees, by yourself or hire a debt settlement company to do it for you.

Debt settlement is one of the popular debt relief programs that saves a lot from overall debt payments. However, there are a lot of debt relief scams that involve debt settlement companies. It is risky, and you might end up paying lots of money just to ruin your credit. Even if the deal goes well, it will remain on your credit report for up to seven years.

Take money out of a 401(k)

Withdrawing money from your 401(k) to pay off your credit cards won't help. This is because 401(k) payments are usually expensive. On top of loan fees, you might have to pay taxes on your borrowed money.

You might have to pay the full amount if you quit or lose your job. If you are younger than 59.5, you may have to pay an extra 10% tax. In addition to that, you'll lose some of the interest your retirement savings would have earned.

File for bankruptcy

Being a senior, you can file for bankruptcy when you've tried everything else and nothing works. Bankruptcy shouldn't be your first choice because it can hurt your credit, but it can sometimes help you get out of debt.

It's a big and complicated decision, so you should talk to a bankruptcy attorney before you file.

Chapter 7 bankruptcy: A senior person must pass a "means test" to qualify for Chapter 7 bankruptcy. In Chapter 7 bankruptcy, a person's qualifying assets, such as cars, gold, and other things around the house, will be sold to pay off debts as much as possible. The remaining debt balance is then discharged. You can keep some assets, like your home if you qualify for an exemption. Some debts, like student loans, mortgages, or car loans, can't be discharged. Also, Chapter 7 bankruptcy will stay on the credit report for 10 years.
Chapter 13 bankruptcy: In Chapter 13 bankruptcy, a person would work with the court to make a plan and pay off the debt over the next three to five years. As long as the person keeps making those payments, most of the debt will be canceled at the end of that time. Some debts can't be wiped out. For example, home and government student loans can't be eliminated. After filing for Chapter 13 bankruptcy, it stays on the credit report for seven years.

Conclusion

It is wise for any older adult needing debt relief to explore options. Seniors have plenty of valuable alternatives to handle their debt problems, based on the type of debt and their financial situation. Most of the time, debt consolidation is the safest choice to keep your credit profile intact. If you have no other choice, debt settlement may also be helpful, as it can save a lot from the total outstanding debt payment. If you have no other option, you may opt for bankruptcy filing. But remember, consult an expert, such as a financial advisor or a financial attorney, no matter what option you choose. Best of luck!

Guest article submitted by: Lyle Solomon

Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for the Oak View Law Group in California as a principal attorney.