Bankruptcies Wallop Older Americans

It was the week before Christmas. She should have been busy decorating her home and preparing for guests. Instead, Brenda Broadbent, then 59, had a massive heart attack that required quadruple bypass surgery.

That should have been the worst of it. It wasn’t.

Her medical ordeal soon turned into a financial crisis because Broadbent, a former real estate agent from Bradenton, Fla., was one of millions of Americans without health insurance. Her hospital costs totaled nearly $100,000.

“When I got my hospital bill, I almost had another heart attack,” says Broadbent, now 63. “My income stopped. I couldn’t do real estate. My mind was so foggy, I couldn’t function.”

Broadbent, a grandmother of four, sold the three-bedroom home she’d just spent thousands of dollars to renovate, and its contents, to pay down her burgeoning medical and credit card debt. But that wasn’t enough. Four years ago, she joined the fastest-growing group of bankruptcy filers in the United States—adults age 55 and older.

It’s a group that accounted for nearly  a quarter of the more than 1 million Americans who filed for personal bankruptcy in 2007, an AARP study reported. The study, conducted last year, also found that between 1991 and 2007, personal bankruptcy filings soared by nearly 151 percent among people 55 to 64, and by almost 178 percent among those 65 to 74.

High health care costs accounted for many of the bankruptcy filings. Researchers believe that, like Broadbent, adults under age 65 and not yet eligible for Medicare were particularly vulnerable to financial ruin when a serious illness hit.

But people age 75 and older who’d been receiving Medicare, Social Security and other retirement benefits for years didn’t escape financial harm, either. In fact, they saw the highest jump in filings—an increase of almost 567 percent over the 16-year period.

The researchers pointed out that many put themselves in peril by borrowing too much, in some cases cashing out the equity in their homes, to help their children or grandchildren.

Others turned to their credit cards. According to a 2007 report by Demos, a public policy research group, the average credit card debt among people age 65 and older rose by a staggering 194 percent, from $1,669 in 1989 to $4,906 in 2004. Those between ages 55 and 64 saw a 121 percent increase in debt to $5,916.

“You think that people in this age group are sort of set with their fixed income and their nest egg, and what really emerged from the report shows that this is not the case,” says Demos spokesman Tim Rusch. “Fewer people than ever have enough savings and home equity to carry them through their retirement years. This trend is more than likely going to continue.”

Debt counselors, bankruptcy lawyers and others say many older adults are using credit cards to charge necessities, like prescription drugs, groceries and unexpected home repairs, rather than overspending on luxuries.

“Older people use their credit cards for medications or medical bills when they could not otherwise afford them,” says Carmen Dellutri, a Fort Myers, Fla., bankruptcy lawyer. “Many take out cash advances on their credit card to help a family member, usually a child or grandchild who needed help with medical bills, housing or a car. I hear that story at least once a week.

“Older people know the meaning of the word ‘commitment,’ and they are truly remorseful that they cannot pay the bills as they come in,” he adds. “I’m certain that many of my clients would go to their graves paying debts if the creditors would be willing to work with them.”

Broadbent, who recently took a minimum-wage job at a fabric store after being unemployed for a year, says she would have paid off her medical bills “in a heartbeat” if she’d been able to. Instead, she says, the hospital refused to negotiate her bill and promptly turned her case over to a collection agency, which contacted her continually.

“They called me every six minutes. I timed it,” she says. “It got so bad I was in tears all the time. I thought, ‘How am I going to get well when I have people hounding me for money that I don’t have.’ I’ve always paid my bills and I’ve always believed that if you buy something, you’re supposed to pay for it. I felt guilty and I still feel guilty.”

Not surprisingly, recovering from bankruptcy can take years. Researchers at Ohio State University’s Center for Human Resource Research say it can take people 12 years to catch up on their savings, compared with those who never filed for bankruptcy, and 26 years to recover their net worth.

That’s an especially daunting task for older adults because there are fewer years in which to rebuild a nest egg, says Leslie Linfield, executive director of the Institute for Financial Literacy, a research and education organization in Portland, Maine.

Moreover, the new bankruptcy law, enacted in 2005, makes it more difficult and considerably more expensive for many Americans to wipe out debt by declaring bankruptcy. Debtors—particularly those who earn more than their state’s median income level—are less likely to qualify for Chapter 7 and erase their debt, as Broadbent was able to do.

Instead, they have to file under Chapter 13, which requires paying off some or all of the debt over a designated period of time. In addition, filers must then go through a “means test” to determine how much debt, if any, they can pay. And they must get credit counseling and take a financial management course at their own expense.

Steve Elias, a Northern California attorney whose book The New Bankruptcy is due out in September, called the cost of filing for bankruptcy “the single biggest impediment” for people. Lawyers’ fees alone doubled with the new law in California, mostly due to higher filing fees and more administrative work. He says that lawyers in California now charge between $1,200 and $1,400.

That’s not what Congress intended when it first passed bankruptcy laws in 1800, Linfield says. The concern was to help people get out from under crushing debt.

“If you owed more than you owned, and you were never were going to get out from underneath that, you could … petition the court for forgiveness of debt and start all over, so you could be a contributor to the economy,” Linfield says. “The Founding Fathers wanted this. That’s the philosophy behind bankruptcy.”

But she argues that older Americans are simply not afforded an economic fresh start because of their age. “I’ve been waving that flag for years,” she says.

Willie and Jesse, 66 and 69, figured they’d be kicking back and enjoying life in the new Maryland condominium they purchased for their retirement years. But their lives took a different turn. They filed for bankruptcy last year to stave off foreclosure.

The monthly payment on their subprime, interest-only loan ballooned to more than $2,000, says Willie. Their meager income from Social Security disability and retirement benefits couldn’t cover the mortgage and other basic expenses like food and energy costs.

“We cannot meet these monstrous payments,” Willie wrote in a letter to the AARP Bulletin. “We can’t get refinanced because we are in bankruptcy and have no equity in the home. We have no hope.”

Elizabeth Warren, a Harvard Law School professor and coauthor of the AARP study, says she believes boomers and older adults on the doorstep of retirement are likely to continue the trend of higher bankruptcy filings in the coming years.

“More people in their 50s and 60s are still making mortgage payments and carrying credit card balances than ever before,” she says. “Those debts make them vulnerable to any other problem—an illness, trouble with their pensions, loss of a part-time job, an adult child or grandchild who needs significant help. The squeeze is getting more intense, and without years of high earnings ahead of them, much of the pain falls directly on seniors.”

Carole Fleck is a staff writer for the AARP Bulletin.