Retired, in debt: Is bankruptcy the answer?

After years of borrowing, a couple's debt-laden retirement is no fun

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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Question for the expert

Dear To Her Credit,
For years, my husband and I have been struggling to meet our monthly bills. We were using our credit cards to pay our taxes as well as any emergency. We finally sold our home last year and paid off two mortgages and purchased a small condo in an adult community in New Jersey. (We're both 60.)

We still have serious credit card debt of about $56,000. We have no mortgage, but the taxes and common charges on our condo are over $1,000 per month. My husband has been looking for a better-paying job since we moved, but no one is hiring people over age 60, it seems. I earn my income babysitting. My husband's current job closes from December through March, so at least he'll collect unemployment benefits.

We used to borrow from one credit card to pay another, but they've lowered our limits so we're in over our heads. What can we do? After paying our monthly expenses there's nothing left to pay Chase and Discover! Can we claim bankruptcy? -- Gail

Answer for the expert

Dear Gail,
You've got one good thing going for you financially right now -- your paid-for condo. Don't jeopardize it by filing for Chapter 7 bankruptcy.

You've probably heard you can keep your house in bankruptcy. However, homestead exemption amounts vary by state. New Jersey has no homestead exemption, but it allows you to use the federal exemption amounts. Those are none too generous at $34,900 ($17,450 for each of you). Say your condo is worth $150,000. Your equity after the homestead exemption would be $115,100. The bankruptcy trustee will look at that equity as a potential source of funds to pay your creditors.

Another reason not to file for bankruptcy is that you don't owe enough money. You card debt of $56,000 is serious, but it shouldn't be financially fatal. Because of the tremendous cost in time, energy, emotional trauma, guilt, and legal and trustee's fees, bankruptcy should only be entered into when there is no other alternative; for example, if people suffer a catastrophic illness or business failure and owe more than they can ever pay off.

In your case, with two people still able to work, no children at home and a paid-off condo, you are in a good position to find ways to pay off your debt. It won't be easy, and it may mean drastic changes to your lifestyle. It will be worth it. And it's the right thing to do.

As long as you are in average or better health, I recommend you find a full-time job and expect to work for the next five to 10 years. Babysitting is a great way to make extra income, but if you can't make ends meet, you need something with better pay. Look for a job that provides benefits, if possible, including retirement plan contributions.

If you are getting hit with late fees and over-limit fees, you may want to see a credit counselor. Be sure to use a reputable agency affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. One thing a counselor may suggest is filing for Chapter 13 bankruptcy. Chapter 13 is not what most people think of as bankruptcy. You still have to pay your debts -- or most of them. However, Chapter 13 puts a stop to more fees piling on, stops collection proceedings such as wage garnishment and puts you on a plan to pay most or all your debts back in three to five years.

Filing for Chapter 13 is not free, and it does take away some of your control of your own finances. Like any bankruptcy, it affects your credit rating, especially if your debts are paid off completely.

Don't give up. Going back to full-time work can be a chance to meet new people and to discover new talents and capabilities you may not have known you had. Good luck on your new adventure!

See related: Explore all options before declaring bankruptcy, Is bankruptcy right for you? Our 7-point checklist will tell you

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Updated: 11-23-2017