Avoiding Bankruptcy in Old Age

More than a million Americans found themselves unable to deal with their debts last year and filed bankruptcy. Older Americans on fixed incomes are often hit hardest by debt. People 55 and older accounted for 22 percent of all those in bankruptcy proceedings in 2007, up from only 8 percent in 1991, according to a new AARP Public Policy Institute paper.

Bankruptcy rates generally dropped after the bankruptcy law was amended in 2005 to make declaring yourself insolvent more difficult. But "the financial condition of seniors is serious enough that they are going bankrupt anyway," says University of Michigan Provost Teresa Sullivan, a coauthor of the paper. For most people who declare bankruptcy, she believes, "it's not the case that they have done something wrong. It is that something has happened to them that they didn't foresee."

The authors have not yet analyzed the specific reasons for the sharply higher bankruptcy rate of older Americans. In general, "the top three reasons for filing are job loss, medical problems, and credit cards, and credit card balances often go up when someone loses a job or gets sick," says Deborah Thorne, an Ohio University professor and report coauthor. "We expect to find that, for people 65 and older, the medical issues are going to take the lead because the cost of prescriptions and care has gone up."

Although bankruptcy in older Americans is often caused by factors outside their control, Thorne recommends that seniors make sure they have adequate health insurance, get enough exercise and eat healthy foods to avoid illness, and stash as much cash as possible into retirement accounts to cover expenses. She also advises seniors to try not to carry a credit card balance, saying that "older Americans are most likely to misunderstand the terms of their credit card agreement." For her part, Sullivan says she has already signed up for long-term-care insurance.

Meanwhile, people under age 34, who have been beset by unprecedented credit card and student loan debt, have sought out a clean financial state less often in recent years, dropping from 46 percent of bankruptcy filers in 1991 to 26 percent in 2007. "Lower bankruptcy filing rates for younger people may be the result of healthier finances," suggests Elizabeth Warren, a Harvard Law School professor and coauthor of the paper. "However, young people may be juggling debt longer before they take more extreme measures. If that is the case, we can expect to see more bankruptcies on the horizon as generations X and Y grow older."