As you contemplate your parents’ need for assisted living, memory care, skilled nursing, or in-home care, you may be worried to discover that they have more debt than you realized.
What if they have a mortgage or home equity loan with a substantial balance? Or a car loan that they’ve been struggling to pay off? Or a credit card that is maxed out?
What if they have medical debt that exceeds their ability to pay? Is this going to impact their ability to get the care they need?
The answer, in most situations, is no. In the case of assisted living, debt is typically not a deterrent so long as your parent has the financial means to pay the monthly fees. In the case of a nursing home placement, your parent may be in better shape by paying off various debts, such as a car loan and credit cards. Once your parent is debt-free and has fewer liquid assets, he or she may qualify for such programs as Medicaid or the Veterans Aid & Attendance pension benefit.
“We always think debt is a negative,” says Michael Guerrero, Senior Benefits Advisor for Elder Care Resource Planning, a San Francisco-based business that specializes in helping families nationwide find resources and programs for financing eldercare. “One of the unintended upsides of having debt is that it can be used as a strategy for helping a parent or loved one reach the financial criteria they might need to qualify.”
As an example, let’s say your elderly mother has about $30,000 in car loan or credit card debt. If paying off this debt leaves her with less than $2,000, she would qualify for Medicaid under the individual asset limit. (For couples, that limit is $3,000.) Assets such as car, personal property, and household belongings are not part of the countable assets.
“If the person is elderly and married with debt and savings, the debt becomes an important piece of the strategy,” Guerrero says. “Each spouse can keep half of what they have together. So, if there are two individuals in their early 90s who have $100,000 in liquid assets, 50 percent is considered that of the applicant and 50 percent is considered that of the spouse. If the applicant uses $50,000 to pay down debt and the couple has $52,000 together, then the applicant is qualified.”
These are federal guidelines, but since each state runs its own Medicaid program, there may be slight variations based on where you are located. However, Guerrero observes that all of the state programs have a “blind spot” when it comes to debt. “They do not look at debt for a couple,” he says. If the couple has a $100,000 and a $35,000 mortgage, use $35,000 to pay off the mortgage. Debt can be a useful tool when it comes to these spend-down requirements.”
As part of the strategy, Guerrero advises, “Don’t pay off the debt before you apply. Apply for the program, and then pay off the debt as part of your strategy for qualifying.”
Guerrero adds that the VA Aid & Attendance program has a similar blind spot as it relates to debt. “Because the program ignores debt, you can pay down debt and use it strategically to help you qualify,” he says.
Paying down debt is good if it can keep you in a positive net worth situation. As Guerrero observes, “Net worth is savings minus liability. When net worth becomes negative, that’s a tough situation for a senior.”
If debt becomes a problem, it’s important to look at the type of debt that’s been incurred. There are various types of debt, Guerrero points out, including the following:
1 – Student loans—This debt can easily reach into six figures and is starting to become more common among older Americans. In some cases, it’s seniors who have taken on the debt for their children or grandchildren. “Student loan debt is hard to get rid of, and it will follow you to the grave,” Guerrero says.
2 – Mortgage/home equity loans—secured by the value of the home.
3 – Car loans—secured with the car as collateral.
4 – Credit card debt and personal loans—typically unsecured.
5 – Medical debt—also unsecured and often exceeds the recipient’s ability to pay.
“Medical debt can be astronomical,” Guerrero says. “Most lenders won’t let you go beyond your ability to pay, but medical debt is an exception to that.”
When debt has become too high to manage, the key is to prioritize. “Pay your mortgage, then car loan, and then your credit card debt,” Guerrero recommends.
Making medical debt a lesser priority may be a necessary part of your strategy—although attempts should be made to pay it back. “All debt must be addressed and prioritized,” Guerrero says. “Nothing can be ignored, but some rise to the top while others are more on the bottom.”
Guerrero recommends talking to a bankruptcy attorney if debt becomes an insurmountable problem or could threaten your parents’ assets such as their home. However, keep in mind if you are your parent’s Power of Attorney, your authority might not extend to bankruptcy transactions.
If your Power of Attorney documents do not contain these provisions, you can take steps to revise the document. Otherwise, your parent would need to be present and have the mental competence to understand the process before proceeding with the filing.
Getting Care While in Debt
Having debt will typically not prevent your parent from getting into most assisted living communities. “They typically will look at your net worth—how much you have in the bank and other assets,” Guerrero says. “They want to know when they take on a client that they’ll have the ability to pay. Debt usually doesn’t come into the picture. Credit scores and reports are not a direct factor in your ability to use these services.”
In the case of a nursing home placement, Guerrero reports that acceptance is based on medical need as well as ability to pay. “You’re required to pay 30 days in advance. They don’t extend credit. It’s ‘show us the money.’ However, they often look at your ability to qualify for Medicaid.”
In the case of in-home care, payment also is required upfront. “In many cases, it’s a shorter window of paying a week at a time,” Guerrero says.
A Touchy Subject
Guerrero concedes that debt is a touchy subject for many older people. “They grew up in the Depression Era and have the mindset that you always pay your debt,” he says. “It’s a generation gap issue.”
Adult children may have to convince their elderly parents that paying off debt is secondary to their health and wellbeing, Guerrero concludes. “You may have to say, ‘Mom, you only have $1,200 a month. Forget about paying off this debt right now. You have to worry about yourself first.’”
CHIME IN: How are you and your parent dealing with debt?