Struggling with debt is challenging at any age, but the closer you get to retirement, the scarier it can be. It’s hard enough to save up for a 30-year retirement, but when you add significant debt to the equation, it’s virtually impossible.
One debt relief option is debt management through a credit counseling agency. On a debt management plan, your credit counselor can negotiate lower interest rates for you, reducing your monthly payment on many unsecured debts. You make one monthly payment to the agency, which then makes payments to your creditors on your behalf.
“Typically, this will reduce the overall interest paid, the monthly payment and the total amount of time it takes to pay off the debt in full, generally between three to five years,” says Ken Mohammed, a certified credit counselor with nonprofit American Consumer Credit Counseling and a member of NerdWallet’s Ask an Advisor network. “The reduction of interest will often save the client years of making payments.”
However, that’s not always the best option, especially if your ability to save for retirement is at stake, notes Liz Weston, a certified financial planner and NerdWallet columnist. In that case, filing for bankruptcy, which can eliminate or restructure debt, may actually be a better choice.
We talked with Mohammed and Weston to understand when debt management plans and bankruptcy are best for people in their 50s who are nearing retirement and struggling to make payments on consumer debt, which includes credit cards, medical bills and personal loans.
What are the pros and cons of a debt management program if you’re 50 or older?
Mohammed: For people in their 50s, it can make sense to do a debt management program if they already have healthy retirement savings and can afford both their basic living expenses and a debt management payment. With reduced monthly payments and interest rates through a debt program, they may then be able to allocate more funds to their retirement savings.
Weston: One issue with debt management plans is that they don’t necessarily take into account that many people in their 50s are facing their last, best chance to save for a decent retirement. When you’re younger, you may be able to take five years off from saving for retirement and then amp up your savings afterward to try to make up for lost time. You still have the wind at your back, since your retirement funds have decades to earn compounded returns. In your 50s, the wind is in your face. You don’t have a lot of time to save or for your returns to compound. I believe people approaching retirement age should be encouraged to pack every dime possible into retirement plans rather than diverting that money into the coffers of credit card companies that will get along just fine without it.
How can you determine if a debt management plan is right for you?
Mohammed: There is a lot to consider to determine the best option to eliminate unaffordable, high-interest debt. The most important aspect is budget. People should consider whether they’re living within their means or if there are areas of the budget they can cut back on. Can they afford a debt management plan payment and save for retirement? If not, then what is the next best option?
I would encourage people who want to pay down debt affordably to go through a credit counseling session to learn about ways to eliminate debt, including a debt management program and bankruptcy. I would also advise them to speak to a bankruptcy attorney regarding the pros and cons of filing for bankruptcy and to get advice on whether they would have to file Chapter 7 or Chapter 13. If they must file for Chapter 13 bankruptcy, I would recommend getting an estimated payment before following through with it. There are instances in which a Chapter 13 bankruptcy can yield higher payments than a debt management plan.
Weston: If people can pay off their credit card debt within five years while still saving for retirement, then a debt management plan can make sense. If they can’t – if it’s one or the other – they should explore bankruptcy.
At this stage in life, when would it be a better choice to file for bankruptcy?
Mohammed: It may be better to file for bankruptcy when people are living within their means and cannot afford to pay back their debt (through a debt management plan or by working with their creditors directly) and who don’t have retirement assets that would be in jeopardy of liquidation. This would include assets they planned to use or sell for retirement like a second home, cash savings, valuable items like art, stamp or coin collections, a second vehicle or retirement funds over the federal bankruptcy limits ($1 million per individual). Bankruptcy will either eliminate the debt (Chapter 7) or restructure the debt so the client can pay it off over time with a lower payment (Chapter 13).
Bankruptcy is also a better choice if the debtor requires the legal protection it offers. For example, if clients have debts in collections, they can be sued by their creditors for nonpayment and face a possible wage garnishment. Wage garnishment can often make basic living expenses unaffordable and saving for retirement nearly impossible. A bankruptcy can stop the legal proceedings and possible wage garnishment, but a debt management program cannot.
Some of our clients decide to file for bankruptcy after their initial consultation. However, it’s important to note that even after filing for bankruptcy, it’s still up to clients to make additional cuts to their budget to put as much money toward retirement as possible. Also, paying for things like a child’s education or helping an elderly parent and keeping recreational assets such as a motor home may be prohibited in a bankruptcy. A debt management plan does not require that clients give up any assets (though it does restrict the use of credit) and it reduces their interest rates and payments.
Weston: People with troublesome debt need to explore whether bankruptcy is a better option and do so with an experienced bankruptcy attorney who knows the relevant state laws. Credit counselors are not lawyers and can’t advise you about whether bankruptcy is the better choice, even if it is.
Among bankruptcy’s potential advantages are the end to collections and the protection of your retirement assets and at least some equity in your home and cars.
You can get a fresh start without struggling for years to pay what may be unpayable debt. Credit scores actually typically rise with bankruptcy filings, and you can begin to rebuild your credit right away.
American Consumer Credit Counseling is a nonprofit credit counseling agency in Auburndale, Massachusetts.