Mom's Medicaid leaves no money left for debt repayment

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Dear To Her Credit,
My father passed away in April. My mother is now facing a long-term nursing home stay. She will have to apply for Medicaid.

After Medicaid takes its part from her pension, she will only have $44 a month left to purchase clothing and pay for other expenses. The problem is that she has credit card bills she has been paying on, plus a loan at the bank that she will no longer be able to pay.

My mother's house is in my sister's and my name. She doesn't have anything listed in her name other than the bills. What do we need to do about the outstanding bills? Also, do we need to send a letter to let them know what she can't pay them because all of her pension is going to her health care?  -- Vicky


Dear Vicky,
When a senior has no assets or available income, she is what is called "judgment proof." That is, creditors can try to collect, going so far as to try to get judgments against her, but they will come up empty-handed. It's an unfortunate situation for both your mother and her creditors, but it's certainly not unusual.

The best thing you can do is inform your mother's creditors of the situation. They can stop wasting money on hopeless collection efforts, and you and your mother can stop receiving letters and phone calls that you can't do anything about.

There may still be a problem if your mother transferred her house and any other assets to you and your sister recently, however. Steven J.J. Weisman, a Boston lawyer who specializes in probate and elder care matters, cautions that if your mother owed significant credit card debt when she transferred the house to you and your sister, and she made the transfer to make it difficult for the credit card company to collect, the transfer of the house to you and your sister could be voided. Intention is an essential element of a fraudulent transfer.

"Another significant factor in determining whether or not the transfer would be considered a fraudulent transfer is the amount of the credit card debt," says Weisman. "If it were a relatively small amount, the likelihood of the transfer being considered as being done to defraud the creditor would be less."

Your mother may also have trouble getting Medicaid to pay for her nursing home care right away if she transferred her home to you and your sister within the past few years. Many people put their homes in their children's names as they get older. If they own a home but don't have cash to pay for nursing home care, Medicaid would allow a person to receive Medicaid, but Medicare puts a lien on the home so it recoups its money after the person dies. To avoid losing the homes that they want to pass on to their children, people transfer homes earlier in the game.

To avoid having people transfer homes and then immediately qualify for Medicaid, state Medicaid officials may "look back" as far as 60 months to determine if an applicant has recently transferred assets. If that is the case, your mother may face a penalty, which consists of her being ineligible for Medicaid for a period of time. The actual period of time she could be ineligible for Medicaid depends on several factors, including the value of her home and the average private pay cost of a nursing home in your state.

See related: Judgment-proof debtors have an imperfect shield

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Updated: 01-18-2018