According to a survey by CESI Debt Solutions in Raleigh, N.C., nearly 40 percent of all seniors say they have accumulated debt in their retirement years that they won't be able to pay off during their lifetimes. The heirs will have to deal with it, and depending on the state you live in, that can be unpleasant. In addition, seniors have a higher likelihood of ending up with large medical bills and other encumbrances that can make their golden years more like lead years. The choice between dodging creditors' phone calls or tapping your retirement accounts to unload unmanageable debt is not attractive.

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Bankruptcy versus a reverse mortgage

Bankruptcy and reverse mortgages are two very different ways of dealing with the same problem. Chapter 7 bankruptcy involves liquidating non-exempt assets (like cash in the bank, a boat, and a third car), paying your unsecured creditors with the proceeds (VISA, for example, or your medical bills), and leaving you with a fresh start. This is the most popular bankruptcy plan and works best for those with limited assets. In most cases, your home equity is exempt and so is your retirement account. Chapter 13 bankruptcy allows you to repay your creditors using your income. It's a better plan for folks with assets they don't want liquidated and sufficient income to pay some portion of their debts over time.

Whichever plan you choose, you will probably be able to protect your home equity and retirement accounts from creditors and distribute them to your heirs when you die. Both bankruptcy options result in some damage to your credit score and will subject anyone who has co-signed on loans with you to collection efforts and credit damage.

Reverse mortgage

Reverse mortgages allow you to exchange some home equity for a lump sum with which to pay off your debts. No repayment is required as long as you remain in your home. You may also be able to add a line of credit or receive monthly cash payments in addition to retiring your debts.

A reverse mortgage does come with fees and its balance does grow over time. Your heirs may inherit less (depending on your state's probate laws) than they would if the debts were simply charged to your estate. If anyone has co-signed for your debts, their obligation disappears when you pay off the loans through a reverse mortgage.

It's not necessarily an either - or proposition

If you are in very poor financial straits, talk to an attorney. Your best bet may be to file for bankruptcy protection first to discharge overwhelming debts and save your home and your retirement savings, then take out a reverse mortgage. Your bankruptcy filing won't disqualify you from reverse mortgage eligibility (credit rating is not a factor), you'll be able to supplement a low income with monthly checks, and any remaining home equity or retirement savings will eventually revert to your estate.