California, it turns out, is a great place to retire.
Not because of the cost of living, certainly. In spite of the cost of living.
Because California exemptions are very generous to those of retirement age.
Those exemptions effectively make many indebted seniors collection-proof.
How exemptions protect seniors
Exemption laws come from the idea that, even if you owe money to creditors, a certain level of income and assets are protected from collection.
- If you earn a wage, California law caps the amount of your wages that can be garnished at 25% of your after tax paycheck.
- Pension income cannot be levied, before or after it’s paid to a retiree.
- IRA’s are exempt to the extent necessary for support
- The California homestead is $175,000 for individuals over 65
- Social Security is exempt everywhere
It’s not hard to see that a California senior with home and retirement income might have nothing that a creditor with a judgment could reach.
That doesn’t mean that creditors will stop trying to collect. They can bug a retiree, using shame, fear, and annoyance to get them to voluntarily pay a debt they owe.
But there may be no way for the creditor to compel payment of its claim at the present.
Is bankruptcy necessary
So, one of my tests for do you need to file bankruptcy looks at whether bankruptcy would allow you to keep something that you might otherwise lose to a creditor who gets a judgment against you.
If the answer is yes, bankruptcy may be appropriate.
If the answer is no, it may be different. If that creditor-with-a-judgment can’t tap your bank account or intercept your pension check, functionally, bankruptcy doesn’t make your situation any better.
You’re safe from your creditors.
Is bankruptcy helpful
But life isn’t all about money. Peace of mind has a value not measured in dollars and cents.
For some seniors, the fact that they owe money they can’t pay is a source of stress. Even when they know that the pushy, threatening collector can’t take anything from them, they lose sleep and emotional security.
Bankruptcy might have a benefit to those stressed out seniors, not because it’s necessary to preserve their assets, but because it’s necessary to for their peace of mind.
Bankruptcy and the next generation
Lots of elders are intent on leaving something financial to their heirs.
I hear it repeatedly from those getting along in age: they want to leave their home to their kids. They want to keep paying on a life insurance policy, even though no one is dependent on them for their care. They are stretching themselves financially to give some value to their heirs.
Here’s where bankruptcy makes it possible to leave an inheritance to the next generation.
The exemptions that are available in bankruptcy are not available to a probate estate. Probate will protect the homestead if there is a surviving spouse. No surviving spouse who needs the home to live in, and the home may be sold to pay the elder’s debts before anything goes to the offspring.
Most revocable trusts direct the successor trustee to pay the debts of the person who has passed away before distributing the trust estate to the beneficiaries.
Neither probate nor revocable trusts make it possible to avoid judgment liens that attach to homes. Bankruptcy does.
So, by eliminating debts and perhaps liens as well, a senior intent on leaving a financial legacy to their survivors maximizes their gift by wiping out their debts during their life time.
Not a bad thing, perhaps.
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Passing a home to kids without probate or risk
Image courtesy of Ed Yourdon and Flickr.
