Is your legacy to your kids an encounter with your unpaid creditors?
Debt problems for those over 65 may not be problems for the elder at all. Income and assets are largely protected by law from creditors.
But that doesn’t trouble creditors: they’ll simply wait and get their money from your kids.
Seniors enjoy protection from collection
Elders in California have a raft of legal protections from creditors. Exemption laws, pension law, and the Social Security Act often make it hard for creditors to seize the assets of elders, even to pay legitimate debts.
The argument against bankruptcy for the elderly relies on the relative legal impunity of seniors to debt collectors.
- Social security is absolutely protected from non governmental creditors.
- Pensions and other retirement savings are beyond the reach of even those with a judgment.
- Houses are illiquid and it’s difficult for creditors to force a sale.
- Seniors usually have no wages to be garnished.
Seniors often have the option to use those legal and practical protections to ignore paying old debts in favor of paying today’s expenses.
But just because you can ignore old debt, is that consistent with your bigger vision?
Not if that bigger vision includes your legacy.
When debts outlive the debtor
What happens to your bills when you die? Turns out, the debt lives on.
Your heirs don’t inherit your debt; that is, the survivors don’t become personally liable for Mom’s credit card balance.
But debt gets paid in full before heirs receive anything.
In a probate proceeding, debts are paid before the estate is distributed. If the person who has passed created a living trust, the trust usually provides that the successor trustee pay the trustor’s debts first.
Even if property is distributed upon death without probate or satisfaction of the decedent’s debts, the property distributed remains liable for the debts of the decedent for some period of time under state law.
Either way, when debts survive the debtor, the heirs either inherit a much diminished estate, or a ticking time bomb in the form of assets that are exposed to claims of Mom’s creditors.
Creditors play a waiting game
You’ve heard about the time value of money? That’s a fancy name for interest. Interest on the money you owe.
The passage of time and the interest on the debt is meaningless to the elder who can avoid paying it during their lifetime, but time and interest eats up the elder’s estate.
For creditors, so what if there are few immediate collection avenues.
Waiting works for a creditor.
- Wait til the senior passes on.
- Wait while the interest builds up.
- Wait til the records of prior payments or settlement are lost.
The creditor may even be able to guilt the family into paying the debt from their own pockets after the senior passes on.
The generosity gene
And at heart, almost every senior wants to give something to their children at their death. That impulse seems to be genetically implanted in the human soul.
But under our legal system, paying debts has a higher priority than leaving a legacy for your children.
So bankruptcy is uniquely appropriate for a senior with debts who also has assets that are protected from creditors during their lifetime.
The exemptions that protect the assets under state law, the laws that made the senior judgment proof in the first place, are also available in bankruptcy.
Without bankruptcy, exemptions just hold the creditors off during the senior’s life time. The debt just lays in wait, to collect ultimately from the estate.
Bankruptcy exemptions are so much more generous than probate exemptions. There may be no exemptions in probate if there is no surviving spouse.
Exemptions, after all, are designed to protect the survivors.
But not the heirs.
Bankruptcy alters the equation
A bankruptcy, by contrast, eliminates unsecured debts, like credit cards and medical bills, while the exemptions protect assets.
Discharged debt is forever unenforceable. Bankruptcy law returns unfettered ownership of exempt assets to the debtor.
For those whose wealth is tied up in their home, the advantages of bankruptcy are eyepopping: when a California senior files bankruptcy, they can exempt $175,000 in after-tax equity in their home.
Without bankruptcy, that $175,000 in equity goes first to creditors. Ouch!
Social Security, current and future, doesn’t even become part of the bankruptcy equation. Pensions and 401(k)s are likewise, outside of the bankruptcy.
A successful bankruptcy to assure the passage of assets to the next generation requires an experience bankruptcy lawyer.
But the results are worth it.
With the existing debt gone, there’s more for family.
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