Budget Basics
Debt management Tips for Seniors
by Aleksandra Todorova
March 2004
NO ONE WANTS to spend his or her golden years struggling with credit-card debt. But, sadly, an increasing number of seniors are doing exactly that. For people living on fixed incomes, escalating debt can lead to financial ruin.
Many of the debt-management options available to younger people - like getting a
second job to pay off the debt faster - don't make sense for senior citizens. But
that doesn't mean there's nothing they can do about it. Here are some overlooked
debt-management strategies that can help retirees dig themselves out of the hole.
1. Reverse Mortgages
People struggling with high-interest credit-card debt are typically advised to tap
the equity in their homes. But that's a bad idea for retirees. "I tend to cringe
when I see seniors refinancing their houses at a late age," says
Howard Dvorkin, president and founder of Consolidated Credit Counseling Services in
Fort Lauderdale"I believe a house is something you retire with. You don't want to be 75 and still making mortgage payments."
For some, a better option is a reverse mortgage. With reverse mortgages, home equity
is converted into cash, which is received on a monthly basis, in a one-time lump-sum
payment or as a credit line to use whenever needed. The appeal is that, unlike any
other type of home-equity loan or refinancing maneuver, the money received through
a reverse mortgage doesn't need to be paid back - as long as the owner continues
to live in the house. For many cash-strapped seniors, this creates a source of income
that could last the rest of their lives. (The amount of the loan depends on the
owner's age and the value of the home. Use the AARP's reverse-mortgage calculator
to see how much you will get.) Keep in mind, only those who are age 62 or older
and who have fully paid off their mortgage are eligible for this type of transaction.
"It can really dramatically improve the quality of life for many homeowners," says
Bronwyn Belling, a reverse-mortgage specialist at AARP.
There are potential drawbacks, of course. First, the owner must be comfortable with
the idea that they won't be leaving the house to the kids - it will be left to the
bank instead. Since the homeowner is drawing from the home's equity and not paying it back, his heirs will have to settle the loan after he passes away, either by
selling the house or by coming up with the money elsewhere, should they want to
keep it.
Also, because the lender isn't getting repaid right away, the company will want
to make sure the property is being properly cared for. "There's an annual certification
that the homeowner is in the house, and the lenders pay companies to notify them if the taxes and insurance aren't paid," Belling says.
Finally, about 6% of the home's equity will go to cover the loan's costs (although
the homeowner probably won't feel it, since those costs are deducted from the home's
equity). For more on reverse mortgages, see our story.
2. Tapping Life Insurance
For those lucky enough to have a permanent life-insurance policy with cash value,
one option is to consider taking a cash-surrender loan, which is basically a loan
that doesn't have to be paid back. Here's how it works. The cash value of the policy
is essentially a dollar amount the owner would be paid at any
given time should
he or she cancel the policy. It's also an investment account that can be borrowed
against, explains Byron Udell, founder and chief executive of AccuQuote, a life-insurance
brokerage firm. The longer the policy has been in place, the more cash value it's
built up. The owner can take up to 96% of it out through a so-called cash-surrender
loan. The insurance company will recoup the loan balance, plus interest, after the
owner dies.
For those who are cash-strapped, tapping their policies while they're alive can
be more valuable than in death. "The insurance policy isn't going to do anything
except go to your offspring or other beneficiaries," says Dvorkin. "So enjoy your
life while you're living it."
3. Bankruptcy
Filing bankruptcy is never an easy choice, and it can be particularly tough for
seniors. For starters, there's the psychological component. "I've had a lot of clients
tell me that they're...going through great pain and suffering, because they feel
morally obligated to pay their bills back," says Larry Feinstein, chair of the American Bar Association's bankruptcy committee and a principal at law firm Vortman &
Feinstein. "They have no money, and just servicing their debt exceeds their fixed
income." At the same time, they're reluctant to declare bankruptcy.
Bankruptcy also could be fiscally devastating, particularly for seniors in certain
parts of the country. Bankruptcy laws vary by state; in some states, one might not
be allowed to keep a home or IRA savings. "For senior citizens, the retirement [savings]
and the home are the most important assets," says Wendelin Lipp, president of the
Bankruptcy Bar Association in
"Some states are very generous, some states are skimpy."
Lipp's biggest concern with bankruptcy: It doesn't always solve the problem. "For
older people, if they're on a fixed income and have medical bills that will keep
accruing in the future, the debt will pile up again," she says. "Then, they're put
in this position where they get rid of the credit-card debt, but they have no money
and no credit cards to live on."
Before declaring bankruptcy, seniors should contact a credit-counseling agency to
discuss options with a debt specialist. For those with multiple credit cards, for example, a debt counselor might recommend a debt-management program where the agency
consolidates all bills into a single monthly payment, which is
then disbursed to
creditors. At the same time, it negotiates lower interest rates on the accounts,
which lowers overall monthly payments.
But keep in mind that the credit-card companies pay the agencies a share of each
payment collected through consolidation programs, so there's often a disincentive
for credit counselors to suggest bankruptcy or any of the other options discussed
here, even when it's a reasonable alternative. One way to minimize this risk is
to look for an agency that offers
consumer education and counseling outside of debt-management
programs. For a list of local agencies, contact the National Foundation for Credit
Counselors.
