Debt Consolidation for Senior Citizens: Strategies to Get Out of Debt

Many senior citizens are living with large amounts of debt. The number of families with a head of household over the age of 55 with debt increased by 15 percentage points from 1992 to 2019, according to the Employee Benefit Research Institute. Most of this debt for older adults stems from housing, medical expenses, and credit cards.

Facing a high amount of debt can be overwhelming, especially if you’re retired and living on a fixed income. But the good news is that there are several potential strategies that could help you repay it more easily — for example, consolidating your debt might get you a lower monthly payment.

Debt consolidation for seniors

Debt consolidation is the process of taking out a new loan to pay off your debts. This leaves you with just one loan and monthly payment, which can greatly simplify your repayment.

Here’s a look at your options to consolidate:

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Debt consolidation loan

A debt consolidation loan is a type of personal loan specifically used to consolidate debt. Depending on your credit, you might qualify for a lower interest rate on a debt consolidation loan compared to what you’re currently paying. This could save you money on interest and potentially help you pay off your loan faster.

Or you might choose to extend your repayment term to reduce your monthly payments and lessen the strain on your budget. However, this means you’ll pay more in interest over time.

Personal loans often come with lower interest rates than credit cards — which could make a debt consolidation loan a good option if you’re looking to pay off credit card debt. Keep in mind, though, that you’ll usually need good to excellent credit to get approved for a personal loan as well as to qualify for low rates.

Additionally, unsecured personal loans are more common than secured ones — meaning you don’t have to worry about collateral. This makes them less of a risk compared to other options like home equity loans.

If you decide to take out a personal loan for debt consolidation, be sure to consider as many lenders as possible to find the right loan for your needs.

Home equity loan

If you’re a homeowner, you might be able to tap into your home’s equity with a home equity loan. Similar to a personal loan, a home equity loan is paid out as a lump sum that you can use how you wish — such as to consolidate your debt.

You’ll typically need to have at least 15% to 20% equity in your home as well as good credit to be eligible for this type of loan.

Learn More: What Is a Personal Loan?

HELOC

Another type of home equity loan to consider for debt consolidation is a home equity line of credit (HELOC). Unlike a home equity loan, a HELOC is a type of revolving credit that gives you access to a credit line that you can repeatedly draw on and pay off — similar to a credit card.

You’ll typically need to have at least 15% to 25% equity in your home to be eligible for a HELOC, depending on the lender.

Reverse mortgage

A reverse mortgage is another kind of loan where you borrow against the equity in your home. But unlike other types of home equity loans, you don’t make payments on a reverse mortgage to pay down your balance.

Instead, you’ll receive funds from the lender to use how you’d like — such as to consolidate debt — while your balance increases. The balance will become due if you die, sell the house, or move. Additionally, you must maintain the home and keep up with your property taxes to avoid foreclosure.

To be eligible for a reverse mortgage, you must:

• Be at least 62 years old
• Own your home outright or have a low mortgage balance
• Live in the home as a primary residence
• Keep your home in good condition

Check Out: Too Much Credit Card Debt? Here’s How To Pay It Off

Balance transfer credit card

A balance transfer card could be another option for consolidating credit card debt. This option lets you move your balance from one card to another. You’ll generally need good to excellent credit to qualify as well as to get a favorable interest rate.

Some balance transfer cards come with a 0% APR introductory period, which means you could avoid paying interest if you repay your balance before this period ends. However, if you can’t pay off your card in time, you could get stuck with some hefty interest charges.

Alternative options to get out of debt

There are also other strategies that could help you get out of debt, even if you have poor credit or are on a fixed income, such as:

Budgeting

If you’re looking to get out of debt, creating a budget — and sticking to it — is critical. By tracking your income and spending, you’ll be able to calculate how much you can afford to pay toward your debt each month.

This can also help to trim expenses to free up extra money to put toward your debt and speed up your repayment.

To create a budget:

1. Calculate your monthly income, such as Social Security.
2. Calculate your expenses. This should include both essential expenses (such as rent and utilities) as well as nonessential spending (like entertainment or dining out).
3. Subtract your expenses from your income. This amount is how much extra you can afford to put toward your debt each month.

There are also several free tools that can help you create a budget and find ways to save money or trim expenses, such as AARP Now, Mint, and the Pima Council on Aging’s Personal Budgeting Assistance program.

Downsizing

When it comes to the term “downsizing,” many of us usually think of moving into a smaller home to save money — which could be the right option in some cases. But it can also refer to cutting costs in other areas, such as:

• Financial support for adult children
• Shopping
• Major purchases
• Fees (such as late fees or overdraft fees)

Bankruptcy

If you’re overwhelmed and unable to pay your debt, filing for bankruptcy might be a good option. However, while bankruptcy can help you take control of your finances, it will also severely damage your credit — so it should only be used as a last resort.

There are two main types of bankruptcy available to individuals:

• Chapter 7: With this kind of bankruptcy, most kinds of unsecured debt can be discharged, such as credit cards and medical bills. To qualify for Chapter 7 bankruptcy, you must pass a means test to prove that you can’t afford to pay off your debts. If you’re eligible to file, you'll required to sell non-exempt assets (if you have any) to repay your creditors. Keep in mind that this kind of bankruptcy will remain on your credit report for 10 years.
• Chapter 13: Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy doesn’t discharge your debt in one fell swoop — instead, your debt will be reorganized, and you’ll make payments on a court-mandated repayment plan that typically lasts for three to five years. If you successfully complete your repayment, you could be allowed to keep all of your property, and discharge remaining debt. A Chapter 13 bankruptcy will stay on your credit report for seven years.

Check Out: Personal Loan Requirements

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Additional resources for seniors

If you need additional help managing your debt, here are some resources to consider:

Government-funded programs and other resources

Depending on where you live, you might be able to take advantage of senior-specific programs available from local, state, or federal government agencies.

For example: The Administration on Aging provides a wide variety of resources for seniors, such as:

• Long-term care assistance
• Nutrition assistance
• Pension support
• Retirement planning
• State health insurance assistance

Additionally, your state’s Medicare savings program could help you cover your Medicare premiums, deductibles, and copayments. Be sure to check with your state or local health department to see what other resources might be available to you.

Another resource to consider is a comprehensive guide from the National Council on Aging (NCOA). It includes tips and recommendations from geriatric health experts and advocates.

Credit counseling and debt management programs for seniors

Working with a credit counselor could be a great option for taking control of your debt as well as for other financial goals, such as creating a budget or planning for retirement.

Many credit counselors can also help you set up a debt management plan. Under this kind of plan, you’ll make monthly payments to the credit counseling agency, which will pay your creditors directly — usually for three to five years until your debt is fully repaid. If you sign up for this kind of plan, your creditors might also be willing to lower your payments or waive charges.

Some scam warning signs to watch out for include:

• Asking you to pay money before providing their services
• Promising an increase in your credit score
• Claiming that they can remove negative information from your credit report (even when it’s accurate)

If you’d like to pursue credit counseling, make sure to choose a vetted nonprofit credit counseling agency, such as the National Foundation for Credit Counseling or one backed by the Financial Counseling Association of America.

If you decide to get a personal loan for debt consolidation, remember to consider as many lenders as you can to find the right loan for your situation.

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