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Bankruptcy

Q&A: Bankruptcy may be best option for indebted widow

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Dear Liz: I am an 82-year-old widow with a disabled daughter in a desperate financial situation. Payments on my credit cards and a personal loan eat up half the income I get from Social Security, my late husband’s pension and my IRA. My total debt is over $100,000 and my only assets are a car worth $35,000 and the fast-dwindling IRA with just $25,000. I need advice on how best to proceed: bankruptcy or loan consolidation or something else?

Answer: Please make an appointment with a bankruptcy attorney as soon as possible.

There are other solutions for debt, including a debt management plan through a credit counselor, debt settlement or a consolidation loan. Debt management allows people to pay off what they owe over time, often at a lower interest rate. Debt settlement involves negotiating with creditors to accept less than what they’re owed. A consolidation loan replaces multiple debts with a single loan, often at a fixed interest rate.

Your situation is simply too dire for these other methods to make much sense, however. Bankruptcy could allow you to legally erase the debt and preserve what’s left of your limited funds.

Q&A: Using retirement savings to pay down debt is risky business. Do this instead

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Dear Liz: I’m way behind on retirement funds. I did get pension funds from my employer after 25 years of service but used a large portion to pay debt that was crushing me. I’m widowed, age 62 and work full time as a nurse. I rent my place. How do I catch up? I have $200,000 in an IRA.

Answer: This answer comes too late for you but may help others who are overwhelmed by debt as they approach their retirement years.

People understandably want to pay what they owe, but bankruptcy is sometimes the best of bad options. This is particularly true as you approach the end of your working years and don’t have enough time to replenish your savings. The typical bankruptcy filing can erase debt while protecting the retirement funds you’ll need for the future. Before using your lump sum pension payout to pay debts, you should have discussed your situation with a bankruptcy attorney.

At this point, your best options may be to work as long as possible, save as much as you can and figure out a smart Social Security strategy. As a widow, you may qualify for Social Security survivor benefits as well as your own retirement benefit. You can’t receive both simultaneously, but you would be allowed to switch between benefits. For example, you could start survivor benefits and then switch to your own when it maxes out at age 70, if that amount is higher. Typically you would want to wait until at least your full retirement age to start benefits, because otherwise you’ll face the earnings test that reduces your benefits by $1 for every $2 you earn over a certain amount, which in 2024 is $22,320. Paid services such as Maximize My Social Security or Social Security Solutions can help you determine the best approach.

Q&A: Debt relief offers aren’t all equal. Is bankruptcy a good option?

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Dear Liz: There seems to be an abundance of companies offering debt reduction, debt settlement and debt consolidation programs now. Are there any differences in these programs? Some of these companies offer a program whereby high credit card balances and loans are combined and substantially reduced, and the debtor would make a single payment to said company. What are the pros and cons of this type of program? What would be the effect on the credit history of the debtor?

Answer: If a company is promising to help reduce the total amount you owe, that’s known as debt settlement. Typically, you stop paying your debts and instead make payments to the debt settlement company, which tries to negotiate a deal with your creditors.

Debt settlement can have a substantial negative impact on your credit scores, and you may be sued by creditors that are unwilling to settle. The process can take several years and you may have to pay taxes on any amount of debt that is forgiven, because that’s considered taxable income to you. Once you add in the company’s fees, the amount you save through debt settlement may be less than you expect.

If you’re considering debt settlement, first consult with a bankruptcy attorney (the National Assn. of Consumer Bankruptcy Attorneys offers referrals), because bankruptcy is often a faster, cheaper and safer way to erase overwhelming debt. The most common type of bankruptcy, Chapter 7 liquidation, typically takes three or four months, stops collection actions, legally erases many types of debt and allows you to begin rebuilding your credit immediately.

If a company is promising to lend you money to pay off your loans and credit cards in full, that’s known as debt consolidation. Debt consolidation can make sense if you can get a lower interest rate than what you’re currently paying, the payments are affordable and the loan allows you to get out of debt faster. However, you’ll need to beware of debt consolidation companies that charge large upfront fees or that charge high interest rates. If you have bad credit, you probably would be better off consulting with a nonprofit credit counseling agency than paying high rates for a debt consolidation loan.

Tuesday’s need-to-know money news

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Today’s top story: Changed travel plans on the menu this Thanksgiving. Also in the news: Online shopping already hit holiday-lvel peaks this year, when you can apply for a credit card after bankruptcy, and how the pandemic has made the racial retirement gap worse.

Changed Travel Plans on the Menu This Thanksgiving
Three in 5 U.S. adults who had Thanksgiving travel plans say these plans have been affected by the pandemic, according to a NerdWallet survey.

Online Shopping Already Hit Holiday-Level Peaks This Year
Shopping looks a little different this year.

When Can I Apply For A Credit Card After Bankruptcy?
Your options are limited.

The pandemic has made the racial retirement gap worse. Here’s how individuals can close it.Closing the racial retirement gap for people of color, even in this pandemic, could begin with broadening access and financial education.

Monday’s need-to-know money news

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Today’s top story: Travel insurance options for digital nomads. Also in the news: What to do if you’ve been denied student loan refinancing, a new set of shopping tips in the pandemic, and what really happens when you file bankruptcy.

Travel Insurance Options for Digital Nomads
Digital nomads might travel for extended periods of time, so their needs are different than the average traveler.

Denied for Student Loan Refinancing? What to Do Next

A New Set of Shopping Tips in the Pandemic
Keeping yourself safe.

What Really Happens When You File for Bankruptcy
A look at each type of bankruptcy.

Thursday’s need-to-know money news

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Today’s top story: Why playing the market right now is an especially bad idea. Also in the news: Is student loan discharge in bankruptcy within reach, the difference between being preapproved and prequalified for a credit card, and how your credit score is determined.

Playing the Market Is a Bad Idea, Especially Now
Brokerages have reported a surge in day trading, but the vast majority would be better off in low-cost funds.

Is Student Loan Discharge in Bankruptcy Now Within Reach?
Recent court rulings and lawmakers’ support to expand relief could help borrowers meet the stringent standards.

What’s the difference between being preapproved and prequalified for a credit card?
An unsolicited approval from a credit card issuer can be a red flag—they could be trying to sell you on a card you don’t need or want

How Your Credit Score Is Determined
Unraveling the mystery.