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Is going through bankruptcy safe for retirees?

Baby boomers are entering their retirement years in ever-growing numbers. The Pew Research Center notes that the millennial generation, the group made up of 18 to 34 year olds, is now the largest demographic in the U.S. workforce. We suspect that a demographic breakdown of the population in Illinois would show the same thing.

At the same time, a report by a law professor in Michigan finds that the fastest growing demographic generation as far as filing for bankruptcy goes is the baby boom group. According to his findings, filers who were 65 or older accounted for just 2 percent of actions in 1997. In 2007, the rate had jumped to 7 percent. Many readers might wonder, then, if bankruptcy is a safe debt relief option for those in retirement. The answer is it depends on the circumstances.

Generally speaking, retirement funds are exempt from creditors under bankruptcy proceedings. This is certainly true for Social Security funds. It's also the case for most other forms of funds, such as 401(k)s and pensions.

However, Social Security funds could be vulnerable if they aren't in a separate account and if creditors aren't informed in writing about the fact. If income from pensions is significant, it might mean that a retired filer is limited to seeking protection under Chapter 13. However, this might be difficult to set up if cash flow is such that there is little disposable income to work with.

Individual Retirement Account funds of just over $1 million can be exempted under bankruptcy by federal law. State laws often coincide on this front, but they do vary so speaking with a local bankruptcy attorney is recommended.

Sometimes, home equity represents a retired bankruptcy filer's greatest asset. State laws differ on how much of that can be exempted so it's important to consult an attorney about details.

The prospect a retiree eventually having to move to an assisted living facility adds yet another wrinkle. Those homes accepting Medicaid can't discriminate, but a private home might insist on other family members co-signing a financial guarantee.

Medical bills in general can pose a challenge. They typically would be discharged as part of a Chapter 7 process as unsecured debt, but not under Chapter 13. If the debt has been secured by a previous judgment, a lien could remain.

You can see now why speaking to an attorney is crucial.

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