What Is Debt Consolidation?

Senior citizens have many unique issues that can push them into seemingly insurmountable debt. According to NY-based research company Demos, senior credit card debt increases, on average, 217% from ages 65-69. Many Americans have underestimated what their retirement income will be and wish to continue the same standard of living, even though they haven’t saved enough capital.

Another problem older adults face is mounting medical bills, which often come as a surprise. The cost of living has also increased significantly, so those who merely put their money into savings might be alarmed to find that inflation hasn’t been so kind.

Debt consolidation is one popular option to avoid severe repercussions like foreclosure, repossession or bankruptcy. A credit counselor will enroll you in a customized debt repayment plan. Instead of agonizing over “which bills to pay this month,” you will pay one lump sum to the credit counselor, who will then distribute the funds to your various creditors. Your counselor will also negotiate for lower interest rates and lower settlements, while also lobbying to keep those hounding callers off your back. 

If you have a steady stream of income each month and can afford to pay off your debts at a reduced rate over a period of 36-60 months, then you are a good candidate for debt consolidation. Many people in these programs have a number of separate debts and often miss paying on time, which is the worst thing you can do for your credit score! If your credit cards have high interest rates and your minimum monthly payments are extremely high, a debt consolidation program can stop the escalation and make your payment more manageable. Visit the AARP’s website to enter your data into a “debt consolidation calculator” and see what debt consolidation could do for you.

You should not consider debt consolidation if you fear you might miss a payment with your credit counselors. You should also not consider this if you are good at handling your own finances. Many people prefer to pay off the highest interest cards first and work their way down, gradually paying off these expenses over time. However, if you are in more than $50,000 worth of debt, there is not much a consolidation program can do for you: bankruptcy may be the only way out.

Video: How Does Debt Consolidation Work?

What about Reverse Mortgages?

You may have also heard that many seniors are taking out “reverse mortgages.” Once upon a time, you could only get money from your home by selling or borrowing against your home and making monthly loan repayments. Now, with a reverse mortgage, you can take out a loan against your home but you don’t have to move or repay the loan for as long as you live there. You simply pay the money back plus interest when you die, sell your property or permanently move out. You can receive loan money in a lump sum, as a monthly advance or at any time/amount of your choosing. As of this year, you may also use a reverse mortgage to downsize and pay for a new home.

This might be a good option for you if you’re at least 62-years-old, you’ve paid off your mortgage and you don’t need a minimal amount of cash in your bank account to be eligible for government benefits. If you’re retired but worked hard your whole life to move into a valuable home, then it’s probably time to let your home start working for you. If you live in an area where housing prices are increasing, then you may end up with extra cash after the reverse mortgage term is up. This is why five out of the top ten reverse mortgage markets are in California, New York, Phoenix, Boston, Denver and Florida.

According to an AARP survey, most of those who took out reverse mortgages did so as a way of refinancing their mortgage payments and paying off their existing loan. One-quarter of respondents used their loan money to pay for health expenses and another quarter used it for credit card debt. Though not recommended, 14% of respondents took out money to make investments. Another portion of borrowers wanted to have a cash cushion for emergencies. Of those who borrowed this way, 58% said the loans met their needs and 93% of borrowers said the reverse mortgage had a positive effect on their lives.

This might be a bad idea for you if you want to use the money to take a vacation, invest in the stock market or buy something new. It’s recommended that you only consider a reverse mortgage if you plan to use them for the long haul because they have high upfront costs, so look at the alternatives if you may be moving in 2-3 years. You should also consider the possibility that you made need to borrow the equity in your home later on for unforeseen medical expenses, home repairs or escalating living expenses. Since you are borrowing without making loan payments, the interest rate will continue to escalate each time you borrow, although it may not exceed what your home is worth. In the AARP study, the main reasons seniors decided against reverse mortgages were “high costs” or the desire to leave the home estate to children.

Video: Understanding Reverse Mortgages

What does AARP recommend?

The AARP does not endorse any reverse mortgage products or services. However, they do say that reverse mortgages are good for people who plan to live in their homes for a long time. They add that both reverse mortgages and debt consolidation programs are viable alternatives to bankruptcy. Often times, seniors are better served by local government programs, community resources or federal benefits.

It’s extremely important to shop around and look for a reputable company, which is listed with the Better Business Bureau. Credit counselors should be certified by the National Foundation for Credit Counseling or the Association for Financial Counseling and Planning. The most important thing is that you are educated and consider all options.

Trusted Websites for Seniors:

The American Association of Retired Persons 
National Academy of Elder Law Attorneys Inc.
National Foundation For Credit Counseling
The US Department of Housing & Urban Development
Independent Information on Reverse Mortgages
Senior Journal
Today’s Seniors
Grand Times
Golden Gateway Financial