Personal bankruptcy is a legal process for people who cannot pay off their debts. A 2018 study found that older Americans filed for bankruptcy at much higher rates between 2013 and 2016 than in the past. Major causes of personal bankruptcies include consumer and medical debts as well as job loss or other changes in life circumstances. There were 765,863 consumer bankruptcy filings in 2017. It is difficult to get accurate statistics on the age of people who file for bankruptcy because filers are not required to disclose their age.
Personal bankruptcies are generally filed under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code. In the former, debt is discharged. In the latter, debt is restructured. A Chapter 7 bankruptcy allows an individual to discharge unsecured debt after selling unprotected assets to pay creditors. In 2017, 38 percent of filings were under Chapter 13. In a Chapter 13 bankruptcy, individuals seek to restructure their debt so they can catch up on their home mortgage, car loan, or similar secured debt over a period of three to five years, with the goal of restoring their financial stability and keeping their home and other vital possessions.
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) makes it more difficult to file Chapter 7 bankruptcy. Thus, more debtors must file Chapter 13 bankruptcy and enter into repayment agreements with creditors.
BAPCPA does not address the lack of homestead protection for residents of manufactured housing—which is more prevalent among groups with lower incomes and older Americans—and seems to exacerbate the hardship. The law also limits the ability of Chapter 13 filers to receive a court-ordered reduction of a mortgage when it is larger than the appraised value of the manufactured home (also known as cramming down). It also removed a bankruptcy judge’s discretion to reduce the petitioner’s indebtedness by the amount of the purchase price of a manufactured home, requiring the use of the home’s market value at the time of filing instead. Manufactured homes generally depreciate in value over time (see also Chapter 9, Livable Communities—Manufactured Housing).
The bankruptcy code does protect certain assets. For example, assets held in qualified retirement plans are entirely protected to ensure that people have adequate income later in life. Retirement plans covered by the Employee Retirement Income Security Act (ERISA) are entirely protected. These are established by an employer, follow IRS guidelines, and tax-exempt. They include 401(k) plans. Non-ERISA plans, such as traditional and Roth IRAs, are protected but are capped at $1 million.
Bankruptcy courts are prohibited from modifying terms of loans on primary residences. However, loans on vacation homes, investment properties, and yachts may be modified.
Maintaining fairness in bankruptcy courts
Federal bankruptcy law should increase consumer protections. It should also and ensure access, especially for those with low and moderate incomes.
Bankruptcy courts should not be used to enforce unfair or abusive loan terms.
Bankruptcy courts should be able to modify mortgage loans on primary residences.
Retirement savings, including individual retirement accounts, must be protected in bankruptcy from creditors.
Manufactured housing is subject to unique depreciation and loan-rate circumstances. These should be taken into account when calculating debt under bankruptcy law.