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Baby boomers: When bankruptcy and retirement collide

The retirement years are typically thought of as a time to bask in the delight of grandchildren, to take off with your spouse on extended trips or simply to be free of the fetters of work to putter in the garden or reinvent oneself as a volunteer in the community.

While the economy has recently been surging, many baby boomers are still reeling from the recession of the last decade that cost many their homes and lucrative jobs. If you are a baby boomer who is approaching retirement age, you may find your golden years restricted by insolvency. But for some senior citizens, retirement means facing bankruptcy.

Baby boomers' bankruptcy filings surge

A 2010 study done at the University of Michigan revealed that senior citizens are filing more bankruptcies than ever before and are the demographic group with the fastest growth of filings in the country. In fact, the incidence of bankruptcy filings for those over 64 was twice as many in 2001 than in 1991 — a jump of 2.1 percent to 4.5 percent, with a further uptick to 7 percent in 2007.

It might be easy to surmise that health care costs and medical debt are the harbingers of these bankruptcy filings among older Americans. While those factors can deplete a senior citizen's disposable income, exploding credit card debt appears to also be a root cause of the problem.

How will bankruptcy affect retirement funds and pensions?

If you are a senior citizen teetering on the edge of fiscal insolvency, you are right to question how filing for bankruptcy could affect your pension. For the most part, the news is good. Funds contained in retirement accounts like Keogh, 403(b), 401(k) and 457(b) are safe from creditors' collection efforts in a Chapter 7 bankruptcy.

Funds of up to $1,242,475 that are locked into Roth IRAs, SIMPLE IRAs and SEP IRAs are also exempt from creditors.

For those who have already retired and begun taking their distributions, there is less protection. It's dependent upon the amount of income necessary to meet your monthly living expenses. For those filing for Chapter 7 bankruptcy protection, any funds above and beyond that which is needed to live on could be attacked by creditors.

What about Social Security income?

This is a tricky area, as both disability and Social Security income are protected by federal laws from garnishment by creditors. But there's a caveat — when these funds are deposited into your bank account, the money could potentially be garnished.

In 2011, a rule change established that banks must determine whether a garnishee's federal benefits are included in their bank account before the assets can be garnished. Two months' worth of government benefits including Social Security are protected from garnishment.

Because senior citizens have different concerns than younger bankruptcy filers, it's always prudent to consult a Lexington bankruptcy law attorney about your case before filing for bankruptcy in the golden years.

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