Senior citizens have contacted me to discuss the possibility of bankruptcy for them. Most of them have no assets that their creditors could get; they could "exempt" from creditors all of their assets. What do I say to them?

First, I explain that although a creditor could sue them and get a court judgment, the creditor wouldn't be able to collect anything from them on that judgment. Which means that the usual reason for filing bankruptcy, to prevent creditors from taking their money and other assets, doesn't exist. They are what is often called "judgment proof" but is more accurately "collection proof". Is that the end of the conversation? Not really. There may be other considerations regarding their situation that aren't obvious at first glance. Here are some examples:

Estate planning – A man (or woman, of course) has $150,000 equity in a home, his only income is Social Security benefits, and he has not many other assets. That home equity is fully protected from creditors by California's homestead exemption ($175,000 if you're 65 or older). He also owes $140,000 in credit card debt. A Chapter 7 bankruptcy would discharge (get rid of) all those debts, but why bother since those creditors couldn't collect anything from him? Consider this … If he has someone he wants to leave that house to when he dies, without a prior bankruptcy the house would be sold from his probate estate after he dies and his creditors would be paid from that money, leaving next to nothing to pass on. If he did a Chapter 7 bankruptcy before his death, there would be no debts at the time he died so the house would pass on to whomever he specified in his will.

Late-life planning – Same situation as above but not necessarily with the wish to leave the home to someone. What if this person later needed to reach that equity in the house to pay for his living expenses, either by selling the house or by taking out a reverse mortgage? That $140,000 of debt might be a serious obstacle to doing that. With that debt eliminated by bankruptcy, those options would be available.

The dangers of being collection-proof – Yes, creditors may not be able to collect anything from you, but there can be complications. When a creditor gets a court judgment and the Sheriff’s department is directed to levy on a bank account, they won’t know whether or not the account has exempt Social Security benefits and the bank might not know that either. The money could be tied up for a long time if the person doesn't know what action to take to get the levy released. You still have to figure out how to get that money back (and probably pay an attorney to do it).

Stopping the aggravation – Aggressive debt collectors can seriously bother someone for a long time. Bankruptcy stops that and provides peace of mind.

Only the particular person knows if it's worth the effort and expense of a bankruptcy in his or her situation, but the possible consequences of both ways, filing bankruptcy or not, should be fully considered.

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6 thoughts on “Bankruptcy for a collection-proof senior citizen?

  • January 10, 2013 at 9:02 am
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    what about the statue of limitations on debt in California – 4 yrs.?

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  • January 10, 2013 at 9:17 am
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    Certainly the statute of limitations may be a defense to a creditor lawsuit. That's true for anyone, not just seniors and not just collection-proof people. Whether or not a lawsuit for a particular debt has a valid statute of limitations defense is something that would have to be examined for each case.

    Reply
  • May 10, 2014 at 11:57 pm
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    What if there is some money coming in from retirement (about $500 a month) in addition to the social security and a classic car? The house was newly bought a couple of years ago with the minimum down payment. However, the classic car is the only thing my father has to his name at this point, and it has extreme sentimental value. I can`t believe people can be put in this position after 76 years of good credit; it seems to me there should be other considerations for seniors. Any information would be greatly appreciated as I am making the decisions for my father at this point.

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  • May 11, 2014 at 5:29 am
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    Sophy, I can't say what would happen to your father or what my recommendation would be from the brief facts you present. But in general, there is no special consideration for seniors regarding debts and creditors. In order to discuss your father's situation meaningfully, you and your father should consult with an experienced bankruptcy attorney in your local area.

    Reply
  • April 27, 2015 at 1:46 pm
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    What if you do not own a house, are in debt $45k and the only thing you have is your social security and an old car but you are having trouble getting a job to pay your prescriptions,rent,food, etc but because of your age and the amount of social security (I make $500 over) I cannot get assistance for any type of help. I cannot even pay for the attorney's fees as stated in the ads.

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    • April 27, 2015 at 2:01 pm
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      Robin, it sounds like you fall into the "collection proof" category with no particular reason to file bankruptcy, as described in the second paragraph of the article above.

      Reply

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