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50-Plus and Going Broke

Divorce, layoffs, medical costs—and seductive credit cards—add up to a bankruptcy boom

Sandra Thompson, 64, of Eugene, Oregon, is not a shopaholic with closets full of fancy clothes. To the contrary, she describes herself as a frugal woman with an aversion to debt. But after the death of her first husband, a failed business and a divorce, with no career training to speak of, she found herself going deeply in the hole.

So Thompson started to play "the credit card game," mailing off just the minimum payment to the bank each month. As she discovered, however, a minimum credit card payment, once all the interest and service charges are covered, won’t budge a $12,000 balance.

After much agonizing, Thompson finally decided that there was but one solution. "It was the last thing that I ever wanted," she says, "but you just reach a point where you don’t see any other prospect." Thompson declared bankruptcy, the legal process that allows people to go to court and have most of their debts forgiven.

The number of bankruptcies in America has soared in recent years. In 2003, there were 1.6 million filings, double the number from a decade before. Many filers were age 50 and older. In fact, the numbers clearly show that bankruptcy is growing faster among Americans 65 and older than any other age group.

At the same time, banks and credit card companies are lobbying Congress and the courts to make bankruptcy more difficult. The U.S. Supreme Court is currently deciding a case that will determine if individual retirement accounts (IRAs) will continue to be a federally protected asset in bankruptcy cases. A ruling is expected by summer.

Despite any notion you may have of these filers being spendthrifts, they generally are not. "These are not sleazy deadbeats," says James Caher, the attorney who helped Thompson file for bankruptcy. "The typical bankruptcy filer is an ordinary, honest, hardworking person." Many are facing credit card debt of $20,000 to $70,000, "but there are people for whom $10,000, especially in high-interest credit card debt, is genuinely overwhelming," says Caher, who has practiced bankruptcy law for 25 years, and co-authored Personal Bankruptcy for Dummies.

Why are record numbers of people going bankrupt? Too many people were already living close to the edge when along came the surge in "the big three" financial stresses—divorce, layoffs and uninsured medical expenses. All hit older people hard, especially medical costs. The phenomenon, Caher adds, is also due to the advent of ridiculously easy credit and instant cash.

Another explanation is that most couples today are living on two incomes, not one. "When a family builds a budget around two incomes, the family becomes much more exposed to economic disruption," says Harvard law professor Elizabeth Warren, co-author of The Two-Income Trap: Why Middle-Class Parents Are Going Broke. A generation ago, if a family faced a financial crisis, there was a housewife who could hang up her apron and jump into the job market, at least temporarily, to make ends meet. Today, most wives are already working. The safety net has vanished.

The main solution to the bankruptcy epidemic is not belt tightening, Warren says, because "there’s not a lot of belt tightening to be done." The solution must come at a societal level, she says: "We need to make housing affordable again, give people tax incentives to save and create a social safety net—including better health care and disability coverage."

That isn’t to say that you, the individual, can’t do anything to lessen your chances of ever needing to declare bankruptcy. Foremost, Warren says, cut up your credit cards and start living within your income. If, however, you must declare bankruptcy, know that you are not a moral degenerate, Warren says. "Yes, you are obligated to pay your debts," she says, "but you are also obligated to keep a roof over your family’s head and to put food in your children’s mouths."

Today, two years after filing for bankruptcy, Sandra Thompson has a roof over her head, even if it’s only a mobile home owned by her son. She baby-sits in lieu of paying rent. The $1,030 monthly check she gets from Social Security and the few hundred dollars she gets from selling hand-painted Christmas ornaments cover all other expenses, including the $31 a month she must pay the bankruptcy court.

Thompson doesn’t expect to ever be deeply in debt again. To the contrary, she looks forward to the day when she can cover her bills and have a little to spare. And if and when that day comes, says Thompson, "I intend to go back and pay off the debt I left behind."