With the Baby Boomer generation moving into retirement age, the elderly population in America will rise rapidly over the next couple of decades. The Administration on Aging predicts that by the year 2040, persons 65 years and older will represent nearly 22% of the population. With consumer debt on the rise and our population aging at a rapid rate, the debt load of seniors could represent a real concern for the overall economy. However, more importantly, many seniors could find themselves in deep financial trouble late in life.
Many seniors are on a fixed income that is not sufficient to handle any large, unexpected expenses. With the cost of living rising at a faster rate than income, seniors often find themselves unable to meet their monthly expenses on income alone. Medical bills, prescriptions, and unexpected household expenses can often make them turn to credit cards to make ends meet. With little hope of their income rising in the future, this can snowball into a difficult situation.
Prior to the dramatic downturn in the economy in 2008, money was very cheap to borrow and readily available. Many older citizens borrowed against their homes to finance other life events, help their children, or pay off credit card debt. Others refinanced their homes and took cash out while also extending the term of their loan. As a result, instead of entering retirement debt free and with their mortgages paid off, many carried significant debt with them into retirement.
Many seniors must use credit cards to make ends meet
Debt among seniors skyrocketed in the last decade, up an estimated 83%, according to Federal Reserve data. This debt load has put significant financial pressure on seniors, often forcing them to continue to work well into retirement. Even with increased income and social security, many senior citizens still cannot get by without using credit cards to fund even basic expenses. With income not likely to rise significantly in the future, and the rising cost of living, many seniors could be facing a difficult situation. Paying off high interest debts such as credit cards will likely be impossible.
As seniors age further, the debt crisis can only get worse. Medical costs for seniors will continue to rise as they age, and illnesses associated with old age may make it difficult or impossible to keep working. If their illnesses are significant and debilitating, they may end up in a nursing home or other long-term care facility. When this happens, their ability to pay off credit cards and other unsecured debt diminishes further. Even with Medicare, the cost of nursing homes and other facilities is very high. If they are no longer able to live on their own, their families will need to make a whole host of decisions. Family members caring for elderly loved ones often have to make difficult and undesirable financial decisions for them. Many times, they must choose between keeping their loved ones home and paying other debt.
Seniors can help themselves and their loved ones by being open and honest about their financial picture and their wishes in the event they become unable to make decisions for themselves. Planning can often save confusion and difficulty during a health crisis or other life event.
Is credit card debt inherited?
Many family members are afraid they will be responsible for credit card debts once their loved ones pass away. This is not necessarily true, although some states do hold a surviving spouse accountable for credit card debt. Unsecured credit card debt does not usually pass to heirs, as secured debt often does. Again, there are a few exceptions such as joint accounts and, sometimes, medical bills. It is important that seniors who have significant debt, and their loved ones, know the applicable laws where they live. This can help with financial and estate planning.
Secured debt, backed by something tangible, such as a car or a house, is an inherited debt. Those who inherit the asset must continue making payments to keep from losing the asset to repossession or foreclosure. It’s important that heirs understand the details of assets left to them to avoid being unprepared to maintain or dispose of them.
What options do seniors have to help them manage their debt?
Faced with a mountain of debt, seniors may face severe stress. This could exacerbate medical conditions and/or affect their quality of life. Not knowing where to turn for help could be emotionally crippling, especially if one member of an elderly couple is ill, or worse, both members. Seniors may be too embarrassed to share their debt problems with family and friends, and this could add to their burden. The future could look very bleak for some, but solutions exist to help. Let’s look at a few.
Getting help from family members
While many seniors may be feeling embarrassed and discouraged by their credit card debt problem, they would be wise to share the burden with those who love them. Often times, just talking through the situation can be helpful and alleviate stress and anxiety. Family members who are financially savvy may have creative solutions they can bring to the table. Sometimes, just a little help with budgeting and cash flow management can be a considerable help. Some family members may be able to help with payments or extend loans to clear off balances. Alternatively, they may be able to act as an intermediary if debtors are calling or if accounts have gone into collection.
Family members made aware of a debt crisis with their elderly loved ones should be supportive and non-judgmental. As mentioned, these debts may have accumulated by necessity and not through carelessness and irresponsibility. Being supportive and understanding will help resolve the situation faster than criticism will.
Refinancing an existing home mortgage
One option that may be available to seniors is refinancing their current home mortgage. If they have a good amount of equity and a steady source of income, this might be a viable solution. However, there are things to consider. If they have owned their home for a long time, they may have a short period left before paying it off. If this is the case, refinancing and extending the term of the loan could be a bad idea. Depending on their remaining lifespan, refinancing to a 30-year mortgage, for example, would likely mean never being free from the mortgage burden. In addition, it could mean they will pay much more interest over the life of their mortgage loan.
Rolling their debt into a refinanced mortgage may help solve the problem now, but, if income does not increase and household expenses do not decrease, then chances are they will find themselves relying on credit cards once again. In addition, moving debt from an unsecured position to a secured position late in life is probably not in the best interest of the estate. Seniors should engage in frank conversations with their loved ones about their estate and any legal and financial decisions they make late in life. This can help seniors avoid making mistakes that could have long-term financial impacts.
Take out a home equity line of credit
If a senior has owned his or her home for a long time, or owes less than it is worth, another option is to take out a loan against the home’s equity. These home equity lines of credit (HELOC) allow a borrower to tap into the equity in the home on an as needed basis. Generally, these loans are at a low interest rate, so paying off credit card debt with the proceeds of such a loan seems like a good idea.
The payments on the debt will certainly decrease, but again, if nothing changes in the way of income and expenses, credit card debt could begin to accumulate once more. In addition, the credit debt would move from an unsecured position to a position secured against the home. This could affect the total liquid assets of the estate in a negative way. If things deteriorate, this could also place the home in jeopardy of foreclosure. Losing a home to foreclosure late in life is a catastrophic event.
Apply for a reverse mortgage
A reverse mortgage allows seniors 62 and older to borrow against the equity in their home. However, instead of taking a lump sum amount of money from the bank, borrowers receive the money from the bank in monthly installments. The money goes back to the bank when the home sells, or the borrower dies or moves to another home.
Seniors opting for reverse mortgages need to own their homes outright or have significant equity to draw upon. They must also occupy the home as their primary residence. Reverse mortgages can be written on owner-occupied single family homes, multi-family homes and condos, and manufactured homes that are HUD approved and meet the requirements of the FHA. There are no limitations on how you spend the money, so using it to pay off credit card debt is fine.
The title to the house remains in the name of the borrower. Funds from the estate go toward paying back the loan, as well as the interest on the amount borrowed along with any fees. If there is equity remaining after the repayment, it belongs to the borrower or the borrower’s estate. Real estate taxes must be up-to-date, and the house must be in good condition. Otherwise, the bank reserves the right to call the loan.
Seniors who apply for a reverse mortgage also need to have decent credit scores and verifiable income. Many of the same lending practices of conventional loans apply to reverse mortgages as well. There are several types of reverse mortgages available to senior citizens looking to get cash out of their home. Due diligence is necessary to find the right reverse mortgage to fit the financial needs of the borrower.
The sale of assets
Sometimes, divesting of assets is in order to help manage the finances of a senior citizen. This is especially applicable if he or she is unable to continue living alone or is no longer able to drive. Selling a home, especially if it has been a long time residence, can be traumatic for many seniors. It often sends a clear sign that they can longer be independent and must rely on others to get by. Carefully consider how to spend the proceeds from certain assets. Paying off unsecured debt such as credit cards is not always the best option. Consulting a financial planner or other financial professional is a good idea.
Utilizing a debt relief company
Taking advantage of the services of a debt relief company is certainly a viable option for any senior in heavy credit card debt. Debt relief companies, such as National Debt Relief, help consumers by negotiating with credit card companies to lower the total balance owed. Generally, agents for the debt relief company will take over all correspondence with the credit card companies, which can remove a lot of the stress and anxiety involved.
The customer stops making payments to the credit card companies and begins making smaller payments to the debt settlement company. Once a predetermined amount of money is in a trust account in the customer’s name, the debt relief company will negotiate a settlement with the credit card companies. While credit scores are impacted, the impact is not nearly to the extent of a bankruptcy or foreclosure.
There are many options available for seniors to address the burden of credit card debt. While getting out from under debt is not easy, it is possible, even for those on a fixed income. Seniors, sometimes with help from family, should consider all possibilities and do their due diligence to find the right solution.