Older Debtors, New Problems

  For decades, finding an older American mired in debt was the exception, not the rule. Since the 1960s, millions of Americans 65 and older have owned homes, enjoyed steady income from Social Security, stocks, bonds and pension plans, and have had good health insurance.
  But increasingly, the elderly find themselves sinking deeper into debt. Once the paragon of fiscal conservatism, debtors 65 years and older now are the fastest growing age group filing for bankruptcy. And their debts come not from profligate spending, but rather from trying to pay for necessities on limited income.
  As such, they pose a special challenge for collectors.
  The need to find effective strategies for collecting from those 65 years and older is gaining new urgency after popping onto issuers' and collection agencies' radar about two years ago ("The Graying of Card Debt," January, 2003). The debt burden of older Americans is growing at a record pace, fueled in large part by skyrocketing credit card debt, according to Demos, a New York-based non-partisan public policy group. Demos based its conclusions on data from the Federal Reserve's most recent Survey of Consumer Finances and other sources.
  Average self-reported credit card debt among seniors increased by 89% between 1992 and 2001 to $4,041. That number may be understated, however, since estimates based on aggregate data had the dollar amounts as much as three times higher, according to Demos.
  Among the elderly with incomes under $50,000 (about 70% of seniors), one in five families with credit card debt is in hardship-spending more than 40% of their income on debt payments, including mortgage debt, Demos says.
  The hardest hit: the newly retired. Debtors between 65 and 69 years of age, "had just an astronomical rise in the amount of credit card debt they carried over the decade"-a 217% increase, with an average card debt of $5,844 (chart, page 30), says Tamara Draut, director of the economic opportunity program at Demos. "It just seems older Americans are having a much tougher time transitioning into retirement," she says.
  One significant source of the financial problems of older Americans is their attempt to cope with rising health-care costs, particularly the cost of prescription drugs, while learning to live on a more limited income, Draut says. "It's not uncommon for seniors to turn to credit cards to help finance their prescription drug needs," she says.
  Medical expenses-including deductibles, co-pays, prescription drugs and dental and vision care-played a "significant role" in the run up of credit card balances by the elderly, according to Demos. By 2000, senior citizens were spending an average of $3,526 out-of-pocket annually on health care. Seniors earning less than $10,000 spent nearly a third of their income on health care.
  And the actual health-care costs are only the beginning. "If people can't afford to pay for their prescriptions in cash, you can imagine that when they start adding on interest of 20% to 25% on top if it, there's not a way they're going to be able to keep up," says Henry Sommer, supervising attorney at the Consumer Assistance Project in Philadelphia.
  Older Americans are relying on credit cards more and more because income from traditional sources-pensions and other assets-is on the decline. Over the past few years, seniors' private retirement wealth-typically held in the form of a mutual fund or stocks and bonds-fell in tandem with stock prices. Between 1992 and 2001 (the latest year for which data are available), the average share of seniors' incomes derived from assets dropped from 21% to 16%, according to Demos. At the same time, the share from pensions fell from 20% to 18%.
  That means many seniors are relying on Social Security as their main source of income, says Draut, adding that Social Security never was meant to be the sole source of income for retirees.
  What's more, older Americans are drawing on the equity in their homes to pay their bills. While that might clear up their financial problems in the short term, it saddles them with yet another debt.
  Oftentimes, an elderly debtor will take out excessively high-rate mortgages from predatory lender to pay off credit cards. "It's a mortgage they can't afford," Sommer says. "If they can barely meet their mortgage payments, usually it means they can't pay anything else."
  The elderly often are persuaded to take on additional debt by relatives, says Hugh Lee, director of elder law for Legal Counsel for the Elderly in Tuscaloosa, Ala. "What we commonly see is (the elderly) being encouraged by family members living with them to apply for credit cards that their incomes won't support," he says.
  Many older Americans run into trouble when a spouse dies, Sommer says. The couple may have been getting along okay with two incomes, but the survivor finds that one income "isn't enough to meet the ongoing obligations," he says. "Eventually, it gets out of control."
  About one in 12 of those aged 50 years or older filed for bankruptcy following the death of a family member, according to the National Association of Consumer Bankruptcy Attorneys (NACBA).
  Another factor contributing to older Americans' bad-debt problems is aggressive marketing by card issuers. "The elderly are often extended more credit than their fixed income would necessarily support," Lee says.
  Inexperience with credit also plays a role in seniors' debt problems. "We're dealing with a generation that has traditionally been very careful with money-very good savers, Depression-era folks," Lee says. "They haven't needed credit in their lives" and thus are likely to make mistakes.
  Those pristine credit histories also mean that issuers extend more credit to older Americans "because they've done well at managing finances in the past," he adds.
  Collectors must take all these factors into account when devising collection strategies, observers say. That includes acknowledging the fact that, in many cases, some older Americans simply can't pay.
  Appearances Can Deceive
  On paper, the elderly appear to be financially well off. According to the Administration on Aging in the U.S. Department of Health and Human Services, the median net worth of households with a householder aged 65 years or older was $108,885 in 2000, the most recent year for which data are available. That compares to $55,000 for the total population.
  The largest asset type, the home, accounts for $85,516, or 78.5% of older Americans' net worth. More than 78% of older Americans own a house, according to the government.
  Other major asset types include stock and mutual funds (29%), regular checking accounts (31%), interest-earning accounts at financial institutions (71%), Individual Retirement Accounts and Keogh accounts (25%), and motor vehicles (78%).
  But statistics can be misleading. A closer review of the data shows that while 70% of seniors had net worth of at least $50,000, 8.4% had a net worth of only between $25,000 and $49,999 and 21.5% had net worth of less than $25,000.
  Demos estimates that the typical senior family, with $108,885 in net worth, saw a 10.4% loss in retirement wealth. Older families with moderate net worth-with between $50,000 and $99,999-experienced a staggering 35.6% loss over the same period. The only group seeing an increase was senior families with $1 million or more in net worth. They saw their wealth rise 49.8%.
  Regardless of how much household wealth an older American has, he or she already may have used the equity in a house or other assets to pay other bills. That greatly diminishes chances that a card issuer will be able to recover even a portion of the outstanding unsecured debt.
  According to the Social Security Administration, 91% of persons 65 years or older report Social Security as their major source of income. That's bad news for card issuers because under federal law, they can't garnish Social Security benefits or pension accounts.
  For about two-thirds of the aged, Social Security accounts for 50% or more of their income. And for about 22% of the elderly, Social Security is their only source of income. The average monthly benefit for retired workers was $922 as of December 2003.
  Because many senior citizens are on a limited income, "that individual probably doesn't have as much ability to make larger payments or payments in full as someone who is gainfully employed," says Harry A. Strausser III, president of Edina, Minn.-based ACA International, a collections industry trade group, and of Remit Corp., a Bloomsburg, Pa.-based collections agency.
  That means collectors must find a "creative way" for the debtors to extract cash from whatever assets they may have, Strausser says. "Sometimes they have other places where they have resources, whether it be retirement accounts or life-insurance policies. Some of them have whole-life policies that have a cash balance they can borrow against at no interest or very low interest."
  Another, increasingly common means for elderly debtors to raise cash is to take out so-called reverse mortgages against their homes, Strausser says. Reverse mortgages are available only to people aged 62 years and older who have paid off their mortgage or have only a small balance left.
  With a reverse mortgage, elderly debtors take out loan against their homes, which banks will pay out as monthly payments, Strausser says. The debtor is able to live in the home even though the bank holds the title. "It's a way for them to take that property that was free and clear and turn it into some liquid assets without losing the property," he says.
  However, some collectors rely on traditional strategies, including trying to browbeat older debtors into paying. "We fairly commonly have a client whose only income is Social Security and who doesn't own significant assets, (but) gets dunned over and over again," says Lee of Legal Counsel for the Elderly.
  Such tactics play on older Americans' fears, Lee says. "They equate being careful with money as a very serious societal value," he says. "When they get these letters, even if they can't pay these debts, even if these debts can't be collected against them, there's this irrational fear that they're going to be going to jail."
  Sommer says collectors using such tactics sometimes succeed in recovering at least some of the debt. "Older people have a strong ethic-they should have been paying their debts," he says. "The collectors pile the guilt on them, make them feel they are bad people if they don't pay."
  But such collection tactics can backfire on creditors. Nearly one in five older Americans in bankruptcy said they had filed to stop incessant calls or other collection actions, according to the NACBA.
  Many seniors "feel strongly they need ... to file for bankruptcy, because they have debts they can't pay," and need to "have some official wiping out of the debt," Lee adds.
  Indeed, the number of older Americans filing for bankruptcy tripled between 1992 and 2001, Draut says.
  There is one thing that elderly debtors have in common with other groups, according to Strausser.
  "They're concerned about their debt like anybody else and they want to get it cleared up," he says. "Like all of us, if you get debt behind you, it makes you feel better."