It used to be that once Americans neared retirement, they had whittled down (or eliminated) their debt. Freed from monthly principal and interest payments, these fortunate individuals were prepared to retire with dignity.
Times have changed.
Pre-retirees are mired in debt. Here is the harsh reality confronting pre-retirees:
- Thirty-nine percent of households with one person who is 60 to 64 years-old had primary mortgages in 2010, according to data from Federal Reserve, which was analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal.
- Twenty percent of those households had second mortgages.
Personal bankruptcy filings remain high. Although personal bankruptcy filings for 2012 fell from the prior year, the total number was still high, at nearly 1.2 million filings, according to the Administrative Office of the U.S. Courts. That whopping number is actually understated because approximately 31 percent of bankruptcy filings are jointly filed.
Explore non-bankruptcy options. Before you push the button for the "nuclear debt option" of bankruptcy, you should first explore your ability to restructure your debt. You may want to enlist a qualified credit counselor to assist you with restructuring.
Legitimate credit counselors are paid by banks and other creditors. Remember, your creditors are highly motivated to receive some payment from you, rather than taking their chances if they push you into bankruptcy, where they may get nothing. You can find a list of reputable credit counselors on National Foundation for Credit Counseling website.
According to to the NFCC, more than one-third of all consumers who work with its members are able to manage their debt after receiving financial education and counseling.
Your goal is to come up with a debt management plan. Typically, this involves making a monthly payment to a credit counseling agency, which then pays your creditors. Competent credit counselors have vast experience in structuring these plans. They can often obtain reduced fees that will make it easier for you to make your payments. Once you have fulfilled your obligations, these counselors can assist you in re-establishing your credit.
The fact that you used a credit counselor is not reported in your credit report. But if you negotiate a reduced payment, or go into a debt management plan, these facts will be disclosed. If you make payments pursuant to the terms of your plan on time, those payments will be reported as being made on time.
Implementing a debt management plan typically takes two to three years. At the end of this period, you should be debt-free (excluding your mortgage). Once you have successfully concluded your plan, you will find it surprisingly easy to re-establish your credit.
Last resort: File for bankruptcy. If you are hopelessly in debt, and have exhausted all other choices, bankruptcy is an option. It's not a panacea. Your bankruptcy filing will remain on your credit history for 10 years. During that time, your filing may affect not just your ability to obtain new credit, but possibly your prospects for employment.
Bankruptcy involves filing a petition in federal court. You are not required to retain an attorney, but the process is complicated and difficult for those without specialized expertise. You should look for an attorney who specializes in bankruptcy matters. Accountants and other attorneys may be good sources for referrals. You could also access the National Association of Consumer Bankruptcy Attorneys website. It has a feature that will give you a list of its members in your area.
A competent bankruptcy attorney will first determine whether you qualify to file for bankruptcy. If you do, he or she will explain the pros and cons of filing. Consumers often focus on the possibility of discharging most debt and obtaining a stay against legal proceedings by creditors. However, bankruptcy might mean losing the right to a tax refund and the inability to discharge certain debts like taxes, alimony, child support and most student loans. Filing for bankruptcy can also risk the loss of property that is encumbered by liens.
Evaluating the pros and cons of filing for bankruptcy is a delicate balancing act. It's critical to have the benefit of advice from a lawyer with many years' experience handling personal and small business bankruptcy matters.
Dan Solin is the director of investor advocacy for the BAM Alliance and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His next book, "The Smartest Sales Book You'll Ever Read," has just been published.