A trap for cash-strapped older Americans

June 26, 2013

In January 2013, AARP's Public Policy Institute released a report on its research into the effects of credit card debt on older Americans. The results are not encouraging, showing that middle-income Americans over age 50 carry more credit card debt than younger Americans.

In 2012 the older group's average credit card debt was almost $8,300, while persons under 50 had total credit card balances averaging over $2,000 less, about $6,260.

While bankruptcy may seem like a radical step for older people who have worked hard for decades, it may be a very practical solution that can lift them out of financial trouble.

The debt picture

The PPI found that the kinds of expenses older Americans charge differ from younger people. Half of over-50-year-olds charge medical costs, mostly prescription drugs and dental expenses, contributing an average of almost $900 to their credit card balances. About the same proportion said car repairs drove up credit card balances, and for more than one-third, home repairs went on their credit cards.

Alarmingly, just meeting everyday living expenses led 34 percent of older Americans to use their credit cards, charging groceries, utilities, insurance and rent or mortgage payments. Younger Americans are much more likely to use their credit cards to buy nonessential items.

Older people also tend more to use credit cards to assist family members, sacrificing some of their own financial security. Almost one-quarter of the over-50 group in the survey used their own credit to help relatives, often paying relatives' debts. In contrast, only about one in nine among the under-50 group ran up their own credit card balances to help family members.

Retirement jeopardized

Job loss in the national economic downturn contributed to credit card debt for almost one-quarter of those over age 50 surveyed, and it was the biggest cause of the debt for 15 percent of people in that group. Sadly, losing a job when a person is nearing retirement age has further repercussions. At that point many workers may have accumulated sizeable pensions and retirement accounts that they feel compelled to draw on earlier than anticipated.

The New York Times reports that older people are increasingly falling victim to predatory pension advance loans, which drain their retirement resources and further drive up debt. Aggressively advertised as a solution for older people desperate for cash and unable to qualify for other credit, pension-based loans provide a lump sum and then take the borrower's monthly pension income as payments. Interest rates are not generally disclosed, and the New York Times found that the rates range from 27 to 106 percent.

The deceptive nature of pension advance arrangements has drawn attention from state and federal regulatory agencies, and reform may be on the way. Meanwhile, it cannot be stressed enough that anyone considering a pension advance, or early withdrawal from a 401k or other retirement assets, to pay credit card bills needs to obtain sound advice about managing finances, before potentially falling into a ruinous financial trap.

Reverse mortgages

Reverse mortgages are another option pressed upon older Americans. According to the Department of Housing and Urban Development, there are 57,000 people are facing foreclosure as a result of reverse mortgages. The 9.8 foreclosure rate for reverse mortgages is nearly four times that of traditional mortgages.

In basic terms, a reverse mortgage gives the homeowner a cash payment in exchange for a percentage of the home value upon the home's sale or death of the owner. The process of obtaining the mortgage and determining the amount one can borrow are both complicated. Often, borrowers are not paying the loan back monthly, which can increase the overall cost of the loan.

According to an ABC News report, the number of reverse mortgages issued reached an all-time of nearly 115,000 issued in 2009. In 2012, that number had dropped to 54,000.

One source of good information is a bankruptcy attorney. Certain assets are protected in bankruptcy, and some kinds of debts can be fully discharged. It is far preferable not to put protected retirement assets at risk by expending them to pay down debts that could be relieved through bankruptcy. A bankruptcy attorney will provide practical advice and could help people nearing retirement age get their financial affairs in order before taking steps that put their future security at risk.

Article provided by The Law Office of Andrew L. Kraemer
Visit us at www.kraemerlawyer.com