No immunity to bankruptcy

Originally published in the Financial Post on August 11th, 2010. To go to the Financial Post website please click here

There’s been a fair bit of propaganda lately about it being acceptable to carry debt into retirement, including home mortgages. I don’t recommend this myself, but let’s take this thinking further. Does it ever make sense for retirees to go bankrupt?

It happens more often than you think, particularly if pensioners get stiffed when employers break the pension promise. No surprise that 2009 was a record year for bankruptcies in Canada. Following the 2008 crash, people of all ages were hurt in their investments, but seniors especially so, since they had more to lose and their wealth-accumulating years were behind them.

Between 2006 and 2010, between 7% and 9% of the debtors handled by Toronto bankruptcy trustees Hoyes Michalos & Associates Inc. were 60 years of age or over, says principal Doug Hoyes. Click here to read more

In the two and a half years between January 2008 and May 2010, 33,516 Canadians age 60 or over filed for bankruptcy, according to Industry Canada.

In the five years from 2001 to 2006, the number of Canadians over age 55 declaring bankruptcy grew steadily, says CARP. Twenty-nine per cent of these bankrupts cited overextension of credit as the culprit, while 15% cited medical reasons. Lesser causes were job loss, business failure, money mismanagement and marriage breakdown.

Retirees often don’t think of personal bankruptcy as an option, says Susan Eng, vice-president of advocacy for CARP. Bankruptcy only allows you to avoid paying creditors — and only if all your assets have been liquidated and used to pay those debts, she explains. Seniors in the study often assumed new forms of debt, such as reverse mortgages.

Mid-career bankrupts can start over, but retirees can’t. They need to recover income sources after pensions or savings are devastated. “Bankruptcy does not really help with that,” Ms. Eng says.

Of course, the problem with carrying debt into retirement is that it must be serviced with less income than when working full-time. Some adapt by making only the minimum monthly payments on credit cards, which leads to a downward debt spiral, a journey that often ends with a trip to offices like Hoyes.

Many retirees get into trouble bailing out grown children who were laid off or divorced, says credit counsellor Laurie Campbell, executive director of Credit Canada. “Without a doubt we’re seeing growing numbers of seniors who are becoming marginalized,” she says.

Another reason is “friendly fraud” or affinity fraud, where elders are financially abused by close family members or scamsters who infiltrate trusted networks like church communities.

Hoyes guesses half the seniors he sees choose bankruptcy, although he lays out four less extreme options. He points out that most retirees don’t need to file for bankruptcy because the main reason for considering it is to ward off creditors that threaten to garnishee wages or seize assets. Retirees have no full-time wages, so don’t have significant wages that can be seized. Also, “it is very difficult, if not impossible, for a creditor to garnishee a pension,” Mr. Hoyes says.