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| The Basics | Is it time to file for bankruptcy?
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A couple mired in bills asks Liz Pulliam Weston whether bankruptcy is an option. Plus: a senior wants advice on an impatient salesman who is pushing her to buy an annuity.
By Liz Pulliam Weston
Dear Liz:
We are in quite a tight spot financially. We have extensive medical bills because of poor health insurance and high deductibles, along with past-due credit card bills, past-due taxes and a judgment that a creditor recently won against me in court. This creditor just placed a levy on our checking account, which of course is now overdrawn. There is no possible way for us to get caught up. We have four children and no assets. Is filing for bankruptcy protection an option?
Answer:
Bankruptcy might be the best of bad options, but you'll want to make up your mind fairly soon. The bankruptcy overhaul legislation that Congress passed this year takes effect Oct. 17, and some people will find it much harder to have their debts erased.
Your situation is not at all unusual. A recent Harvard University study found that half of all consumer bankruptcies were triggered by medical problems. Interestingly enough, about three-quarters of the people who filed medical-related bankruptcies had insurance when they became ill or disabled. They often lost their insurance after losing a job or, like you, had inadequate coverage and high deductibles that left them exposed to catastrophic bills.
Another way you're in the mainstream of bankruptcy filers: You have kids. Harvard bankruptcy researcher Elizabeth Warren, coauthor of "The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke," found that having children is one of the leading predictors that a household will file for bankruptcy.
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Ideally, everyone would have adequate insurance and savings to confront the inevitable setbacks life offers. When that's not the case -- and it often isn't -- you should look for alternatives, such as working a second job, trimming your budget and selling assets to pay your debts. If that won't cover what you owe, a bankruptcy filing might be a better course than struggling forever with impossible debts. (For more details, read "8 steps to take before bankruptcy.")
An experienced bankruptcy attorney can apprise you of your options, and many offer free consultations. Good luck. (For more on advisors, read "Beware cut-rate bankruptcy advice.")
Watch out for annuities sales pitches
Dear Liz:
I recently attended an "elder planning" workshop. The presenter said my husband and I should sell our bank stock (worth $95,000) and buy an annuity that's invested in the Standard & Poor's 500 index. Does this sound like a good idea, or is it something to leave alone? We are in our 80s. The presenter is getting antsy and wants us to meet with him to take the annuity.
Answer: Of course he's getting antsy. He's imagining the fat commission he'll be paid for talking you into what may well be an unsuitable investment.
Variable annuities, which combine mutual fund-type investments with an insurance wrapper, often aren't a good fit for elderly investors. You may be in too low a tax bracket to benefit much from the investment's tax-deferral feature, and heavy surrender charges could take a big bite out of your savings if you needed to access your money in the next several years.
What's more, selling your stock could set you up for a big fat tax bill, particularly if your shares have grown substantially in value over time.
A final problem with variable annuities: They aren't given what's known in tax circles as a "step up in basis." Your stock would be revalued on your death so that your heirs wouldn't owe any income or capital-gains taxes if they sold the shares immediately. Withdrawals from variable annuities, by contrast, incur income tax.
Unfortunately, these downsides may not have been explained to you. The salespeople who promote variable annuities sometimes neglect to adequately illustrate their disadvantages, which is one of the reasons regulators have gone after insurance companies and agents in recent years for selling unsuitable variable annuities to elderly investors. (For more details, read "Beware an annuity salesman's scare tactics." )
Bank of America, for example, just announced a settlement with Massachusetts state regulators that would allow customers who were at least 78 when they bought their annuities in 2003 and 2004 to liquidate them without having to pay surrender charges.
Now, it's entirely possible that you might be better off in an index fund or even a certificate of deposit than having so much money wrapped up in a single stock. But you'll want to discuss that issue with someone more objective than an annuity salesperson, such as a fee-only financial planner.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
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