Boomers & Debt: Bankruptcy as Necessary Retirement Planning

Retirement should be a time of relaxation, of enjoyment of the fruits of a lifetime of work and - hopefully - savings. Unfortunately incomes have not kept pace with living expenses for most people. So over the last decades middle class America has accumulated more debt to fill the gap. Unfortunately for those closing in on retirement, most folks in this position will have to work rather than relax.

When this happens bankruptcy is a necessary and reasonable (albeit unfortunate) part of retirement planning and has become more common each year. This is particularly true if a large portion of your debt is unsecured credit cards or signature loans. If it is possible to eliminate all or most of this debt it will certainly improve your financial outlook. But almost as important is the improvement in personal outlook - how you feel every day - if you can accept that bankruptcy is a necessary option at times.

As important to some, it can indirectly help family too. It is not uncommon for children and grandchildren to go into debt to help their parents and grandparents stay current on their bills. Passing on debt to the next generations versus wiping it out with some paperwork and a few court appearances? It can be a very simple choice when the real choices are understood.

Is it the “right” thing to do? That depends on your personal perspective. My view is that most consumer lenders today do not try to do the “right” thing by their borrowers so much as the “profitable” thing. If it is a business - a profit/loss - decision for them, it should be for you as well.

But Congress seems to think so as well. It has provided exemptions which protect most retirement assets. It has protected retirement income from Social Security and many other retirement programs from creditor collection. Congress created the “means test” to identify bankruptcy debtors who have sufficient income to be limited to Chapter 13 help — and then excluded Social Security income from the test, leaving a large portion of seniors able to sustain a better standard of living at the expense of their creditors.

Finally Congress even encouraged everyone who seeks relief in Chapter 13 to help fund their retirement. The 2005 amendments include not only allowances for continued repayment of retirement plan loans but also continued contributions to those plans, even where the contributions are entirely voluntary. In other words, Congress viewed rebuilding and adding to a 401(k) to be more important than repayment of credit cards - in legislation strongly supported by the credit card industry.

The simple truth is that Congress decreed creditors should come second to providing for a reasonable retirement. And folks who worked their whole lives to keep their bills paid deserve a break.

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