Pro Tip: Nervous about living on a fixed income? Then read our guide: How Seniors and Retirees Can Survive the Bear Market.
Why Seniors Can Ignore Debt
|
June 14, 2023
According to a 2016 NCOA study, over half of senior households have substantial debt, with the median average debt for senior households being $31,000 — more than double what it was in 2001.
As of 2021, U.S. census data shows that over one-tenth of seniors live below the poverty line, and they likely have a variety of debts, including credit card and medical debt. While avoiding these debts could lead to penalty fees, collection calls, or even lawsuits from debt collectors, some seniors can actually ignore their debt and avoid those consequences.
In this guide, we’ll examine the variety of ways in which seniors can legally ignore certain types of debt.
Pro Tip: Nervous about living on a fixed income? Then read our guide: How Seniors and Retirees Can Survive the Bear Market.
When a payment becomes overdue, whoever issued the loan (the “creditor”) will begin contacting you by email, phone, mail, or all three. Their message tends to assume that you forgot to pay and includes ways to catch up on your payments through online payment services or mail-in checks. After 180 days of this degree of contact, they can pass off your case to a collection agency, which is when things escalate.
Collection agencies will be more aggressive about retrieving the money. In the case of unpaid credit card bills, they're known for calling the homes of debtors nonstop. Medical bills are more often called in by mail. Other types of debt, including personal loans, auto loans, student loans, and payday loans, differ slightly in their typical collection methods, though the goal to get your money is always the same.
Normally, failure to pay the debts at this point would result in a reduction of your credit score, egregious penalty fees, or even a lawsuit from the debt collector; however, senior debtors aren’t always subject to these penalties.
The reason seniors can sometimes ignore their debts is that Congress protects certain types of retirement income. Even when you owe a debt collection agency, you have a legal right to keep some of your income. Collection agencies often attempt to collect debts hoping seniors don’t know of these rights.
The Employee Retirement Income Security Act (ERISA) is one such protection. The act establishes a minimum amount of retirement and health plan funds that someone who retired from a private industry job must receive. Therefore, ERISA protects Social Security pensions and retirement funds within certain limits, in addition to guaranteeing the payment of specific benefits through a federally-funded organization called the Pension Benefit Guaranty Corporation (PBBC).
Learn more about ERISA and how it applies to your retirement income here.
Note that its protection doesn’t extend to government retirement plans, church plans, or plans established to satisfy workers compensation, disability, or unemployment benefits. However, veterans benefits are another federally protected source of retirement income, secured by certain laws like Concurrent Retirement and Disability Pay (CRDP), which protects a retired veteran’s ability to take out disability, as well as Veterans Affairs compensation.
Individual retirement accounts (IRAs) are another significant source of retirement income that some states protect from being seized as assets in lawsuits from debt collectors. Each state has its own special conditions, but the states to watch out for are those that offer zero or only partial exemptions for IRA accounts. These include California, Maine, and Nebraska for traditional IRAs, and California, Maine, Nebraska, Georgia, Mississippi, Montana, and West Virginia for Roth IRAs.
Remember that it isn’t the end of the world if a debt collector sues you. Your retirement income may be protected by law, depending on the type of income it is, as well as special stipulations in your state’s retirement laws.
Having said that, you have rights against debt collectors no matter where you live, some of which are enumerated by the Fair Debt Collections Practices Act (FDCPA). This law prevents these agencies from using harassing, abusive, or deceptive practices to get payments. Prohibited behaviors include:
Scammers will never acknowledge your rights to your retirement income, but sometimes even legitimate debt collectors will bank on you being ignorant of the retirement income protection laws in your state.
Though your retirement income is often protected from garnishment, other types of income are subject to lawful seizure. This means you should always take a legitimate request from a debt collector seriously and pay off the debts, if possible.
Your wages and bank account balance can be seized based on a court’s judgment if a debt collector requests legal action to resolve their case. If this happens, you may have to pay not only your debts, but also legal fees and other costs as decided by the judge. This is why it’s important to know your rights so that your actions resolve (rather than escalate) the situation.
FYI: Retirement accounts are just one way for seniors to invest. To learn other smart investment strategies, read our guide to safe investments for seniors.
To avoid being scammed, your first response should be to validate the debt in question. Scams that target seniors are becoming increasingly common and involve faking debts, requesting payment information for resolved cases, or collecting on the debt of a deceased relative.
Any legitimate debts will be noted on your credit report. Use this resource to get a free report and view the debts that agencies have a right to inquire about.
Remember that a collection agency is a company explicitly designed to get payments on your debt on behalf of the initial creditor. Their goal is to get any money they can, in any way that works.
Yet, you might still be able to negotiate with them. If you explain your situation, they may accept a lower sum of money or monthly payments just to give something to their creditors and resolve the case.
Legal representation may help you get debt collectors off your back, since you won’t seem as vulnerable to their more aggressive tactics. While most legal services of this kind are expensive, some nonprofit companies offer free legal representation to seniors with debt.
Outstanding debts can be stressful, especially if you have a debt collection agency breathing down your neck with demands or even the threat of a lawsuit. However, you should never pay the debts of deceased family members, debts that have already been resolved, or debts that require protected retirement funds like IRA income or military benefits to resolve.
Despite these protections, your bank accounts and wages are vulnerable to garnishment by collection agencies. Research the income protection laws in your state to learn more about your rights, and consider legal representation if you don’t know where else to turn.