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Bankruptcy in Retirement

Bankruptcy in Retirement

Debt and retirement. It’s not a situation that anyone would like to find themselves in however the number of people that are heading into retirement with debt has been steadily increasing.

To help people understand this situation and how best to deal with it, Anne Arbour, a Financial Educator with the Credit Counselling Society has provided us with some valuable guidance and advice on how to do this in our three part series entitled Debt and Retirement.

In our final and last installment, we tackle the very difficult topic of bankruptcy and the impact this could have on someone’s retirement. Anne spent some time with us discussing this topic with us along with providing us some written guidance on what to do should you find yourself facing this situation.

Here’s our conversation:

By Anne Arbour

There are plenty of articles preaching the importance of retiring without debt. There are also many articles coaching us on how to handle any debt we might have ended up carrying into retirement anyway.

What happens though when that debt just becomes too much and we aren’t able to manage it any longer?

In this third and final installment of our series on debt in retirement, we tackle the difficult issue of bankruptcy in retirement.

In the spectrum of options for dealing with debt, bankruptcy is the last stop on the route. It is a definitive declaration to your creditors that you just don’t have any other resources to exploit or avenues to explore, and that you will not be able to repay your existing obligations.

Each jurisdiction has different rules for how bankruptcies are handled.

In Canada, bankruptcies are administered by a licensed insolvency trustee. The first job of a trustee is to conduct an insolvency test to qualify a potential client, to ensure that the debtor’s obligations outweigh their ability to repay. The trustee will then act as a representative of the debtor, a conduit between the debtor and their creditors, negotiating any agreements and filing the appropriate documents with the courts. The trustee might also be called on to facilitate the liquidation of certain assets of the debtor such as equity in a home in order to satisfy the creditors that all resources have been sufficiently exhausted. Government pension payments and other registered retirement savings are largely protected from liquidation.

In the United States, the typical consumer bankruptcy is called a Chapter 7 filing or a ‘liquidation bankruptcy.’ It as well requires an examination of a consumer’s financial records, with income qualifications dictated state by state. As there are many details and technicalities specific to each jurisdiction, it is widely recommended that any election to file bankruptcy in the U.S. be done in full consultation with an attorney.

Of great concern currently in both countries is the increasing number of bankruptcies being filed by seniors.

In Canada, the Office of the Superintendent of Bankruptcy, a federal agency, released a report that 10% of those declaring bankruptcy in 2014 were over the age of 65, a 20.5% increase in that age group from 2010. In the United States, a study called Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society found ‘a two-fold increase in the rate at which older Americans (age 65 and over) file for bankruptcy and an almost five-fold increase in the percentage of older persons in the U.S. bankruptcy system’.

Reasons for this trend are similar between the two countries with a few subtle differences.

Firstly, as a general society, we are living longer, thereby increasing the chance that we might outlive our resources and our ability to service our obligations. This is compounded by the fact that more of us are entering into retirement with debt in the first place. In Canada in particular, a prolonged period of low interest rates has lulled many consumers into a false sense of financial security when it comes to accumulating consumer debt. As interest rates begin to tick upwards, however, this is going to pose a real issue for seniors on a fixed income. Another factor that has impacted the upward trend of retiring with debt is the inability to manage when life happens. These can range from an unexpected forced early retirement as a result of a layoff (and reduced retirement resources) to a medical crisis to a drop in the stock market that negatively affects a retirement nest egg, with no runway of time to recover.

For many retirees, helping adult children has also become a common theme when it comes to running into financial trouble. In Canada this has typically been to help adult children with the purchasing of a home or other living expenses, while in the United States, persistently high levels of student loans have been cited.

All these factors play into the universal truth that many seniors are saving less for retirement; are entering retirement with debt; and are living close to the edge without sufficient resources to withstand a crisis. For many, in the current climate of rising interest rates, ever shrinking health coverage and social safety nets, what choice is there in some cases but to declare bankruptcy?

It is important to remember that there are costs to bankruptcy that go beyond the numbers themselves. There is a lot of judgement around the concept of declaring bankruptcy, but let’s face it, no one gets into debt because it’s a fun thing to do and few, if any people, go about the business of declaring bankruptcy because it’s a good time. There is a tremendous amount of guilt and shame wrapped up in that decision, and we shouldn’t gloss over the potential impact on one’s emotional and mental health. There are, however, most assuredly, circumstances when filing for bankruptcy is the absolute right decision. It is an option for a reason – to help consumers find much-needed relief, when it feels like there are no other options, to protect remaining retirement savings.

If this is the situation in which you find yourself, consulting a free, not-for-profit credit counselling agency is a good first step to really assess your options and to get some information and support. Such agencies can administer an informal insolvency test to confirm that bankruptcy is indeed your best option, and then make referrals to trustworthy trustees or attorneys who can guide you through the process.

If you are seriously considering bankruptcy, what else can you do to help the process? A few key things:

Don’t add any new debt.

If you are considering filing for bankruptcy or have already started the process, adding additional debt because ‘well, why not?’ can be considered dealing in bad faith which can negatively impact your application.

Be careful about making large payments to one creditor over another just before filing, even a family member or a friend.

This could be viewed by your other creditors as preferential payments and again, jeopardize your application.

Don’t make unusual transactions while you are in the application process.

Going about your regular life and spending money on groceries or new winter boots is understandable, but ‘stocking up’ on a few extra luxury items because you believe the debt will be wiped out anyway is, once again, seen as dealing in bad faith.

Find support.

Surround yourself with people and resources that can provide appropriate mental and emotional support, which will go a long way to making bankruptcy feel like the relief it is supposed to be, rather than a shameful punishment.

Find financial literacy educational resources.

Most jurisdictions require some form of consumer education as part of the bankruptcy process. Avail yourself of these experts to learn ways to move forward with budgeting and learning to live within your means and without debt going forward. You’ve had a rough patch, you’ve sought help, and now you can move forward stronger and wiser.

This is the third and final installment in a series of three posts addressing the issue of retirement and debt. Be sure to read the other two posts;

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Anne Arbour is the Credit Counselling Society’s Financial Educator for the Greater Toronto Area. Anne has over 25 years combined experience in facilitation and financial services, including operating her own small business financing company. She holds an MBA and is a Certified Educator In Personal Finance. Anne has served on expert panels for ACTRA and for FuturFund, and has been interviewed by Global News, Today's Parent Magazine, Canadian Money Saver Magazine and The Toronto Sun.
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