Imagine this scenario. Christopher is a 72-year-old retiree with multiple medical conditions that limit his mobility. He has no retirement savings, so he lives alone on Social Security and supplements this income with a credit card.
But now he’s earning $77,000 in credit card debt and faces some difficult choices.
Invest in gold
Powered by Money.com – Yahoo may earn fees through the links above.
Christopher gets stuck in a cycle where there is little left from his Social Security check after paying his lowest credit card each month. There, he uses his credit card to cover the gap.
One of the bright spots on Chistopher’s financial journey is that he pays back his home and has a fairness of around $350,000. He wants to leave his adult children, but he doesn’t know if it makes more sense to sell his home to pay off and reduce his debt, or if he simply ignores the debt for the rest of his years.
Let’s get into the numbers to figure out what’s best.
A recent survey shows that almost half of Americans over 50 carry credit card debt per month, along with 42% of Americans aged 65 to 74. aarp.
The survey also points out that about half of seniors who have credit card debt feel financially unstable. Of the people in this group, over half have credit card balances of $5,000 or more.
So why do Americans over 50 have so many debts? In many cases, it has nothing to do with frivolous spending. The biggest reasons include daily expenses, vehicle and housing costs. Many also report that healthcare is contributing to debt.
Retirees have several options to reduce their debt, such as reducing costs, using some of their savings, or working part-time. They can also consolidate their obligations, negotiate perhaps better fees, use the cash value of their insurance contracts to pay off their obligations, or take out reverse mortgages. It may help debt-in-law retirees chat with their financial advisors about their options.
In Christopher’s case, his expenses have already been reduced as he spends most of his money on healthcare and pays off credit card debt. And he is in a cycle where not having new debt means slipping through food and medical care.
He will not take advantage of savings or life insurance, and consolidating his debts may reduce the interest he pays, but he may still face high monthly payments with a potentially less ability to cover his expenses.
So should Christopher just ignore his debt?
**Read more: Millions? no problem. It’s only $10 and it’s here How to access this billion-dollar private real estate fund Usually, only major players are available to a variety of assets
Ignoring credit card debt is actually not a practical solution. Without savings, Christopher may need to resort to credit cards in an emergency. Plus, if he stops paying, he will likely be troubled by a debt collector.
Due to the fairness of his home, he is not a “creditor’s basis” and there is also the risk of being sued. In that case, he may be forced to sell the house. With this in mind, he wonders whether he should sell his house now and use his profits to pay off his debts and take away the remaining fairness.
Meanwhile, by maintaining the home, he can hold what could be an asset of gratitude, and does not have to pay for travel and transaction costs. He has several medical conditions, but he still can take care of himself and his property, and wants to age in place rather than move to a long-term care facility.
Christopher can consider a Reverse mortgagehe would be able to borrow money for the fairness of his home. His credit rating is likely not to affect his ability to obtain a reverse mortgage, and the interest that accumulates over time may be less than the interest that accrues on his credit card balance.
If he borrows more than his debt balance, he may be able to better cover his expenses in the coming years. When he died, his adult children were able to sell the house and pay the lender back, or pay it back from savings and maintain the house.
Income from reverse mortgages is not taxable, but if your balance accumulates in your savings account, it may be counted against your Medicaid asset limit. Therefore, if you are eligible for Medicaid, you will want to work with your lender to build a reverse mortgage payment in a way that avoids cutting your benefits.
Christopher was able to decide to continue paying the minimum monthly payment with a credit card and maintain the home. In that case, when he dies, his property will have to pay the debt with the additional interest that has accrued. That means his children may be forced to sell their homes to cover it.
Whether he sells debts and pays them now, ignores debts entirely, or takes debts and pays them, his property will ultimately be less valuable than the value of the house he wants to leave for his children.
Money doesn’t have to be complicated. Sign up for our free MoneyWise newsletter for practical finance tips and news you can use. Join now.
This article is for information only and should not be construed as advice. It is provided without warranty of any kind.
