How to Confront Debt Before You Retire

Too many Americans are retiring with debt.

mature male worried and frustrated about bills
By Daniel Solin

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.
The average debt of all Americans is staggering. Americans of all ages are awash in credit card debt. The average credit card debt for U.S. adults was $4,878 in the first quarter of 2013, TransUnion reported. Almost 40 percent of Americans fail to pay off their credit cards in full, according to the 2012 Consumer Financial Literacy Survey, carrying credit card debt from month to month. Often, these card holders pay exorbitant interest rates. According to Bankrate (RATE), credit card fixed-rates, as of Feb. 26, were 13.02 percent. Variable rates were 15.38 percent.

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.
Unfortunately, there are a lot of bottom feeders who prey on desperate people seeking help in dealing with their credit issues. They charge high fees for little or no service. Avoid them.

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.

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senators should confront US debt before they retire. waiting...

March 07 2014 at 8:42 AM Report abuse rate up rate down Reply

70% of our economy is the purchasing power of us tax payers. Lets put America back to work by our purchasing power and always buy American.

March 06 2014 at 4:05 AM Report abuse rate up rate down Reply
1 reply to toosmart4u's comment

spending is only part of the equation. we need to be savers, too.

March 07 2014 at 8:42 AM Report abuse rate up rate down Reply

Wife and I are retired and just spent 20 grand on new kitchen appliances and a re-modeled bathroom and some landscaping................................Paid for it in cash.............................Buying a new car next year for cash plus the trade in.........................That's because we always lived below our means when we were working and saved/invested 20% of our income......................Now it's paying off...........

March 06 2014 at 12:53 AM Report abuse rate up rate down Reply

Never mind the fact that bankruptcy may affect your chances of finding employment, these days many employers run credit reports on you before hiring. If they don't like what they see, you won't get hired. Same if you are over age 50. You won't get hired. The odds are stacked against many hard working people when it comes to finding a job, especially if you don't have perfect credit and are over age 50. These days having thirty years experience in one or more fields means nothing.

March 05 2014 at 4:23 PM Report abuse rate up rate down Reply

Another "financial expert" who is writing articles trying to increase his book sales.

March 05 2014 at 12:32 PM Report abuse rate up rate down Reply

I busted my butt to pay off my house and cars before retirement. One problem, without a house payment/interest I no longer have enough deductibles to claim deductions at tax time. I am now paying more taxes retired than when I worked. Check before you rush into paying off your house. Will the Interest paid be more than the tax or the other way around.

March 05 2014 at 9:02 AM Report abuse -6 rate up rate down Reply

Live within your means and stop trying to impress people with al the insignificant crap you buy during a lifetime......nobody cares!

March 05 2014 at 8:49 AM Report abuse +10 rate up rate down Reply
2 replies to Jim's comment

Exactly, live below your means, and pay yourself, before you buy anything! Fellow executives at the Software company where I was employed since its startup, laughted when they saw my old farm house, and used 73 landcrusier. Guess what, I retired at 42, those clowns are still humping it to work daily, while I ski, fish, hike, travel etc. If you start buying Blue Chip dividend stocks when you leave High School, and do it monthly, you'll retire with more monthly income from dividends then SocialSecurity payments.

March 05 2014 at 9:05 AM Report abuse +6 rate up rate down Reply

Amen. We gave been debt free for decades. Buy only what you can afford. We have paid cash for our houses, cars, no credit card debt. Pay as the bill comes in and not carry a balance. We were not CEO's or people that made a lot of money. We save and invested in the stock market and still do. It pays off big time.

March 05 2014 at 6:17 PM Report abuse +1 rate up rate down Reply