Managing finances becomes more challenging as our parents grow older. Expenses rise while retirement income remains fixed as cognition declines. Then growing medical bills can upset the apple cart as their health falters.
Many older adults can quickly amass credit card debt; they may never be able to repay it. Fortunately, they may not have to.
The key to negotiating credit card debt is showing permanent hardship while protecting what resources your parents do have in case a lawsuit results in a judgment.
Of course, you will need a legal power of attorney to act on his or her behalf before implementing the primary strategy: default.
Stop Paying Credit Cards
One step senior citizens can take when negotiating credit card debt forgiveness is to stop making the minimum payments. Eventual default is the most definite way to signal financial hardship: the inability to satisfy the obligation.
However, this strategy has a crucial pivot point you should understand before proceeding. The bank or collection agency may decide to file a lawsuit, or just fold their cards and walk away – which is what you want to happen.
Your parent’s supplemental income and assets both play a role in whether this course of action will achieve the desired result.
First, stopping payment on your parent’s credit card accounts could hurt their FICO and Vantage risk scores. Delinquency is a significant factor damaging a score result.
However, low credit scores can affect the elderly in different ways. Ask three critical questions to balance the advantage of debt relief against the possible negative consequences of a weaker rating.
- Will they need to borrow money again?
- Approvals will be very challenging
- Are they still driving?
- Auto insurance rates could go up
- Do they still own their home?
- Property insurance premiums could rise
Garnishing Social Security
Credit card companies cannot garnish Social Security retirement benefits after an elderly recipient stops making minimum payments. Likewise, they cannot seize pension funds governed by the Employee Retirement Income Security Act (ERISA), which can take several forms.
- 401K Holdings
- Deferred Compensation
- Employee Welfare Benefits
However, these legal protections can evaporate if your parent inadvertently comingles any distributions with unprotected assets. For example, required minimum distributions from a 401K plan held in a general account could be fair game.
Therefore, establish dedicated bank accounts to hold deposits from Social Security, mandatory distributions from 401K plans, and other ERISA-protected resources.
Stopping all credit card payments is most viable when your elderly parent is judgment proof, which means that she does not have enough resources or other income to make a legal action profitable for the collection agency.
Debt collectors are most likely to abandon lawsuits when the costs of pursuing legal measures outweigh the potential payback. Since they cannot garnish retirement income, their remaining tools are account seizures and property liens.
Credit card companies have the legal right to seize certain assets held in bank and investment accounts – if they file suit before the statute of limitations expires.
As noted above, ERISA-qualified assets are safe from creditors. However, money held in an Individual Retirement Account (IRA) is not.
Yet, ceasing credit card payments when your aging parent has significant IRA assets could still be a good gamble. Although she is not judgment proof, collection agencies have no way of knowing an IRA balance without investing in a lawsuit first. There are no publically available resources with this type of information.
Credit card companies also have the legal right to place a lien against personal property with equity, such as a house, boat, or automobile. A lien enables the creditor to collect payment directly from the proceeds after the sale of the asset.
However, collection agencies can readily determine the equity in any real estate that your aging parent might own – without having to file suit first. For example, home sales are public records, mortgage balances appear on credit reports, and online tools provide instant value estimates.
Therefore, stopping payment on credit card balances may not be a good idea when mom and dad have substantial equity in their home. You are just inviting a lawsuit you are sure to lose because they are not judgment proof.
Entering a Nursing Home
Admission to a long-term care facility does not protect your elderly parent from the jaws of an agency collecting on defaulted credit card debt. However, lawsuits lose their teeth the longer she resides there.
The national average cost of nursing home care is $10,000 per month. An extended stay can quickly exhaust the life savings of an elderly retiree, and force a home sale – leaving little on the bone for collectors to pick.
Once your elderly parent spends down their assets to meet the Medicaid nursing home resource requirements, she could be immune from credit card debt collectors. At a minimum, there are no longer any bank accounts or IRA funds for them to seize after a court ruling.
However, Medicaid rules regarding homes could leave mom or dad exposed and give the collection agencies reason to move quickly – before the state or facility stakes its legal claim and gets to the front of the line.
- Widows residing in nursing homes without the intent to return must sell their house to fund long-term care expenses
- A surviving spouse can keep the marital home with up to $585,000 in equity (value minus mortgage balance), which leaves a bullseye on the property
- Estate recovery programs allow states to recoup Medicaid costs by selling the house after the surviving spouse passes away
Stopping all payments could also prove helpful in negotiating credit card debt forgiveness if your elderly parent has Alzheimer’s disease or other causes of cognitive decline – whether in a nursing home or not.
Disputing past transactions by using a dementia-based legal strategy is unlikely to produce the desired result. However, many cardholder agreements outline the steps to take if members are dissatisfied with their purchases, which could work better.
For example, a Wells Fargo document suggests the following.
- Make a good-faith effort to contact the merchant and attempt to return the products for a full refund
- You may have the right not to pay the remaining amount due if all of the following are true
- The purchase was made in your home state or within 100 miles of your residence
- You used the credit card for the purchase
- You have not yet fully paid for the purchase