Is Sr. Citizen Bankruptcy a Good "Why Not" Idea?
July 17, 2014 6:05 PM   Subscribe

My mother is 80 years old and has good credit but wonders if she'll ever use it (or even if anyone would allow her a major purchase that would require a loan/credit, considering her age/income/lack of any savings or assets, which seems unlikely from her experience). Her income is (not much) fixed social security and could qualify her for bankruptcy. She could wipe out $200/month of credit card payments with a BK without affecting her house (she co-owns with a sis), and she could keep (not declare) a credit card for emergencies. Are there possible downsides to BK? Or is it a clear-cut case of more income for her senior years?

Would a BK affect the credit offered her by the one CC she would keep and not list as a debtor on the bankruptcy?

She wonders about unlikely emergencies or situations, such as if someday she might be able to help me if I need a co-signer for a business loan or such if she doesn't declare BK -- is it likely her credit would even help me at her age?

Are there other downsides she needs to be aware of?

Or should she just enjoy her current credit cards for a while then declare BK, and then enjoy an extra $200/month?
posted by anonymous to Work & Money (10 answers total) 2 users marked this as a favorite
This is not a question you can get internet answers on. You need the advice of a bankruptcy attorney and/or a CPA.
posted by kavasa at 6:14 PM on July 17, 2014 [4 favorites]

without affecting her house

This is not inherent in Chapter 7 bankruptcy. It is common for the house to be unaffected, but if the house has significant value, the house can be sold to pay creditors. I am not aware of any way for a house in Chapter 13 bankruptcy to be involuntarily sold, but that doesn't mean it's impossible.

she could keep (not declare) a credit card for emergencies

It is somewhat common for credit card companies to automatically cancel a credit card upon learning of a bankruptcy. Bankruptcies are public records even if the card is not declared during filing.

In Chapter 13 bankruptcy, the debtor is generally prohibited by court from having any unapproved credit.

Are there other downsides she needs to be aware of?

She will be offloading her debt onto the general public in order to get a marginal increase in personal income. I find that unethical. Bankruptcy has some value for people that can't otherwise live with their debt. From your description, I don't think your mother is in that category.
posted by saeculorum at 6:17 PM on July 17, 2014 [23 favorites]

There are any number of possible downsides to a bankruptcy; your grandmother, even moreso than average people, needs to work with either a lawyer who handles bankruptcies or a really good accountant to not get burned doing this. There is risk to the house, and I wouldn't count on having a credit card in the future, except maybe for a secured one (and they're typically a ripoff anyway).

Anyway, I think the ethics argument is BS; if bankruptcy works for your grandmother, it's a fair option. The banks and credit card companies aren't constrained by a false sense of "ethics", only by law; consumers shouldn't be either. Making you believe that you have an obligation to pay beyond what is required by law is just one more way corporations fuck you. Companies, cold-blooded legal creatures that they are, default on credit all the time, whenever it's demonstrably beneficial for them to do so. No reason why not to do the same, but however tempting a 'strategic default' might seem, this is really, really not something you want to do without a lot of legal advice.

If you're going to behave like a company you have to make decisions that way, too, and that means hiring professionals to crunch the numbers, not letting your emotions or gut feelings get in the way. And it may be that a potential $200 / month savings just isn't worth it, compared to the costs that will inevitably be involved in doing a bankruptcy right. If there were another few decimal places involved, well, then it might be a no-brainer. But $200/month doesn't buy you much lawyer or CPA time. It may end up being a wash, and then I'd seriously wonder if it's really worth the stress and hassle.
posted by Kadin2048 at 6:43 PM on July 17, 2014 [18 favorites]

Her income is (not much) fixed social security and could qualify her for bankruptcy.

What is the basis for this statement? Simply having low income does not qualify a person for bankruptcy.

Would a BK affect the credit offered her by the one CC she would keep and not list as a debtor on the bankruptcy?

What? All creditors have to be listed in a bankruptcy petition. Not doing so is what the bankruptcy courts like to call "fraud".

I have no idea what the total amount of the credit card debt is, but a monthly payment of $200 suggests it isn't very much. It is probably smarter and cheaper to work out a deal with the credit card company than go through the bankruptcy process. A Chapter 7 filing costs about $300 and the attorney's fee will probably be about $1,500, although this will vary by region.

If she is serious about this, though, she needs to consult a lawyer and not some people on the internet who say her idea is great. Let the lawyer say if this is even possible, and then if so, he'll get to giving the advice of if this is a good idea. Most people want to make their lives less complicated by the time they are in their 80s.

And, I agree with saeculorum. Bankruptcy is for what is termed the "honest debtor" who is crushed by overwhelming debt and who cannot pay his obligations as they come due. It's not for getting rid of a small bill that you'd rather not pay. It would feel particularly unethical to me if debt is incurred to buy necessities like groceries if there is no intent whatsoever to repay. Get yourself something to eat and stick someone else with the bill? I guess she can do that. I don't see anything in your question to indicate she was ever victimized by her credit card's issuer, so it is hard to me to see an evil corporation here.

For those of a scholarly bent, historical cynic Mark Twain received a legal discharge of his debts and then went on a lecture tour to pay them all back in full anyway even though he had no legal obligation to do so. He did this in his 60s during the period many affectionately call the "robber baron era". FWIW.
posted by Tanizaki at 8:46 PM on July 17, 2014 [3 favorites]

Just to clarify, if her payments are $200/mo she owes $8-10k. Is that about right?
posted by michaelh at 9:00 PM on July 17, 2014

So, the bankruptcy trustees are well aware of this kind of strategy. They look askance at someone who moves seamlessly from using their credit cards, to declaring bankruptcy, without any significant change in their circumstances. Meaning that if you can't pay it now, you couldn't pay it then, and that means that you were using the credit with no intention of repaying it, which is fraud. That said, they might not notice or care, but it's a crapshoot. I personally saw my trustee yell at a 9/11 widow and an elderly man who had lost his adult son who had cared for him financially and physically. They're not necessarily charitable people!
posted by the young rope-rider at 7:02 AM on July 18, 2014

I am not giving legal advice here. Just some practical comments, I do wonder why having an extra $200 a month is so important right now and whether there would really be that amount. It is not obvious from your comments. Under your theory, IMO , instead of charging on a credit card, the money would be paid directly for the product needed because there would be no more credit cards. Plus, your mother then would not have credit if she really needs it.

And in the end, when your mother passes and given her age that is getting sooner than later, the credit card debt may not be collectable anyway by the credit card company after her death if she does not have some assets left from which to collect if there is planning.

Bottom line, look at the big picture and go see an attorney, an attorney who can do estate planning and bankruptcy consultation.
posted by OhSusannah at 7:23 AM on July 18, 2014

I don't know much about this stuff but a friend of mine declared bankruptcy a few years ago because of massive debt from her husband's lengthy terminal illness. A lot of that debt was on credit cards. The amount on the credit cards that was wiped out was somehow considered taxable income for her and she was hit with a huge unexpected tax bill as if she had been given/earned that amount as income.
posted by mareli at 9:04 AM on July 18, 2014

mareli, If you get a 1099-c (cancellation of debt reported as income) and it's because you declared bankruptcy, you fill out a form to report that it's excluded from income. There are some side effects that might have cost your friend money, but if she just didn't exclude it, she should talk to an accountant to see if that can be corrected.
posted by michaelh at 10:40 AM on July 18, 2014

Note that in chapter 11 or 13 bankruptcy the debtor isn't completely absolved of debts (that's chapter 7, but then the house might not be safe), instead a court approved repayment plan is set. So that $200 might go down to $160 . Potentially the total debt might stay the same, as it's relatively low. So the estate might eventually be on the hook for it all.

Also, filing for BK is likely going to go on the credit report, and the credit card she wants to keep will show up to make sure they get as much as they can. And her interest rates will be high.

It's probably cheaper/easier to get a LoC against the house, and pay down any other debts, and have one small payment. Yes, this will be against the house, and eventually if not paid back will come out of the estate, but really in chapter 13, with these relatively small levels of debt, any "savings" might be lost in legal fees, and time.

Really, all of this seems hinky, which means that it would be stupid (unless she doesn't like the house, or her sister who co-owns the house) to go into this without a great lawyer. A crap lawyer is probably going to charge $2k to file and will really not add much beyond giving you a bit of peace of mind while filling out forms. So $5+k for a lawyer to go from $200/month payments to $120/month payments - while still possibly having the totality of the debt looming against the estate.

Seriously, get a LoC against the house to make the payments nicer and accept that this is going to hit the equity of the estate. The creditors will be drooling over that equity of an 80 year old and won't go packing nicely. There's also the concept of fraud in bankruptcy filings (possibly intentionally leaving off a creditor might be a form of that - all the more reason to need a good lawyer).

However, I'm not a lawyer and never played with bankruptcy. I bet for $500 or less you and your mom could get more than an hour of all your questions asked, and if you search, can probably get a quick referral for a 15-30 minute consultation to find out if you're a reasonable candidate for BK.
posted by nobeagle at 11:21 AM on July 18, 2014 [1 favorite]

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