Bankruptcy Is Not A Sin

Movimento Sem-Terra (MST) - Brasil (Projeto retratos)
Creative Commons Licensephoto credit: Daniel Zanini H.

As a Bankruptcy Counselor, I hear everyday how people are so stressed from their debt that they can’t sleep. I say this isn’t necessary, nor should it be happening. Why should people have this much stress over money the rest of their life? They didn’t commit murder, yet it would probably be easier on their mind if they did. All they did was borrow more than they could afford, had an unfortunate event happen to them, or both.

Bankruptcy’s Stigma

There are people who abuse the system, but you can’t let a few ruin it for the many. Bankruptcy shouldn’t have a stigma attached to it.Most people who file for bankruptcy have an unfortunate event happen and they are over extended. Of course some of that could be prevented with some personal finance knowledge. But who’s to blame for that? Can you blame someone who doesn’t really know any better?

If we lived in a society that sacrificed a virgin to the gods? Doesn’t that make it ok to kill a human being if it means better crops?

We live in a spendthrift society. It’s the norm to have everything you want because it makes us feel good. So can you blame people for borrowing money if it makes us happier?

The Lender Should Be Responsible

The way I see it is that you shouldn’t give personal loans to someone unless you think they will pay it back or you can afford to lose it. And if something happened so that they couldn’t pay it back you should work with them so that they would be able to pay for it. Otherwise you obviously don’t want the money back.

Why do some banks not want to work with you until you say the magic word “Bankruptcy”? They say it’s because if they did then everyone would try to have the bank work with them. I don’t buy it. First off, the bank could verify your income and prevent those that can really afford it from taking part in it. There’s really only one first off because that would solve the problem. Would the banks not be making more money because the interest is still accruing?

Dave Ramsey Is Wrong

Dave Ramsey doesn’t promote bankruptcy because it’s a “gut-wrenching, life-changing event that causes lifelong damage.” I don’t think so whatsoever. That’s more like the description if you don’t file for bankruptcy.

I hear people all of the time saying they wish they did bankruptcy sooner. They say that because it was so emotionally gut-wrenching to stick it out for so long.  Being relieved of that burden of debt is such a wonderful feeling.

What I Am Saying

I’m just saying if the banks won’t work with you and you tried all of your other options, don’t stick it out and hope it gets better. Make it better yourself by filing bankruptcy. It’s really not the end of the world.

But of course if you are pondering bankruptcy make sure you know about the negatives and positives. It can be harder to get credit in the beginning but you can start building up you credit right away.

If you had to go through bankruptcy because of mismanagement, then be sure you learn how to manage money because you will live in misery for 8 years because that’s how long it will be before you can file another chapter 7 bankruptcy.

If you filed because of an unfortunate event, then try to learn from it and try to prepare from it happening again.

Stop waiting and make something happen.

What do you think about bankruptcy?

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{ 25 comments… read them below or add one }

Raam Dev

I invested in three multi-family properties when I was 21 with the intention of keeping them long-term. By the time I was 25, the values on all three properties had more than doubled. But I was holding adjustable-rate mortgages (2 year fixed, 28 year adjustable). I had intended to refinance and switch to fixed-rate mortgages before they adjusted.

Then the real-estate market fell through the floor and suddenly all three of my properties were valued at less than what I owed the banks. Unable to refinance, I was stuck with those mortgages. When the mortgages adjusted, the mortgage payments went up by more than $500 per property, per month. At that time, I was already dishing our money from my pocket to pay for the properties (taxes and other expenses had gone up).

I immediately listed them for sale, but it was too late. The market was falling and nobody was buying. I tried talking to the banks, but they were too busy dealing with all the other people who couldn’t pay. I ended up filing for bankruptcy at the age of 27. I didn’t think anything negative of it. The decision was a net-positive as far as I was concerned.

I learned so much from the 6 years as a landlord and then I was presented with a situation that was entirely out of my hands. I was given an opportunity to start fresh. After filing, I sold the remainder of my possessions, quit my job, became a nomad, and now I’m traveling around the world living my life-long dream.

Bankruptcy is simply a tool. It’s a business decision, not the end of your life. If filing for bankruptcy makes the most business sense, then you do it. Plenty of very successful people have multiple bankruptcies on their record (Donald Trump for example).

If you’re interested, you can read more about my real estate and bankruptcy story here: http://raamdev.com/category/real-estate

Reply

Kevin

Your exactly right. You can even look at Dave Ramsey now. He’s a millionaire after filing for bankruptcy. It’s really a fresh start for you. Thanks for the comment

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Kevin@OutOfYourRut

I agree with what you’re saying. Bankruptcy itself isn’t the “issue”, it’s the financial mess that necessitates it.

A lot of people are of the opinion that bankruptcy is something evil, when it’s actually extremely necessary in an economy that runs on credit. People have to have an outlet when they get too far under, otherwise millions of people will be unable to fully participate in the economy, and that hurts everyone, not just the debtor.

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Kevin

That’s a very good point. It’s kinda like the circle of life :) but of credit

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Early Retirement Extreme

Bankruptcy is the reason that people are paying 20% on their credit cards instead in 8%. The one’s that get hurt are not the banks but all the other borrowers. What we really have is a form of insurance. Credit ratings (imperfect) are then used to pool people differently.

The main problem with the current system is that the “insurance” is mandatory. So, for instance, people who do know how to manage their own money and take full responsibility for their actions get to pay for those who don’t.

That’s the moral issue of the side.

I think it’s important to understand that a bankruptcy doesn’t mean that the problems disappear. They simply get transferred to the lender instead.

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Kevin

Well credit is a business so yes they do have to make up for the losses. Credit cards aren’t a requirement to live in the world, so if you don’t want to be charged 20% then pay off your balance at the end of the month and their won’t be problems.

I see credit cards as just a way for people, that lack the knowledge that paying in full is better, to hurt themselves financially. So in a way they’re just like payday loans.

Would you feel bad if a payday loan company went out of business because everyone filed bankruptcy? I wouldn’t, because that’s one of the risks you face when you offer loans/credit. I don’t need credit cards. I’m pretty sure you don’t need credit cards to float a balance. So who is it really hurting? Just the companies that pray on the weak.

But yea there are moral issues like keeping your word and such. But if I have a choice of either keeping my word for something I didn’t know any better and being stressed all of my life, or breaking my word; you better believe I’m breaking my word. Call me bad but you have to think about you and your family first. Not some company that could care less if you died.

ps none of my words are an attack on you. for everytime except one time when I say you or your I meant people in general. :)

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Meg

The credit card companies starting jacking up interest rates a full year before huge numbers of people started defaulting on the payments. I agree with you–if you don’t want to pay 20% or more in interest, then pay your bill off every month.

The Dave Ramseys of the world are snake-oil salesmen, out to get what they can out of frightened people. I was reading all the comments to his post that you linked to in yours, and 99% of them were people who benefited tremendously from filing for bankruptcy or would benefit tremendously if they did. One of them pointed out that in the near future there will be no stigma attached to it because it will be the norm as opposed to a rarity. Given today’s congressional shenanigans, banks have been given even more opportunities to screw the customer, so there are going to be even fewer people arranging to consolidate debt and pay it off.

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Kevin

If you read the comments for Dave Ramsey’s thoughts on bankruptcy you’ll see a lot about how bankruptcy helped them a lot. It really is a do over.

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Early Retirement Extreme

Again, the existence of bankruptcy simply drives up costs for other borrowers insofar that the people who are likely to declare bankrupt can not be put into their own “pool”.

It is similar to paying more in health insurance because your neighbor is not taking care of his health.

Yes, people can avoid this problem entirely by not taking on debt, but for those who do, bankruptcy spreads the cost of one’s financial failure to everybody else.

I think it has a stigma because it seems to happen mainly to those who are overextended. The moral stance is that there should be uncomfortable consequences for living above one’s risk-adjusted means. Such a lifestyle (without savings or insurance) could be deemed frivolous which the more prudent people obviously do not condone (since they’re footing the bill). Another way of looking at it is that the individual benefits enormously by declaring bankruptcy at the cost of the whole. It is yet another example of the tragedy of the commons. Hence, it require a moral component to restrict or regulate this behavior.

PS: When I say “people” I typically mean “present company excluded” :-D

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Kevin

I see. I see. I can understand that. Perhaps that person shouldn’t have access to credit for oh lets just say 10 years. That could be a good deterrent and help the cycle of bankruptcy. Those people don’t really need to be using credit anyways.

On another note, I’m guessing credit card companies don’t care about the prudent people, because after the people that overextended themselves file bankruptcy, they send them applications for more credit…weird.

I just say we get rid of the credit industry and we will all be better off. Just saying.

Reply

Financial bondage

I filed once in 2003. I vowed (God willing) to never go there again. It is a scary event. And it’s not cheap. My attorney was $1,400 as I recall. I borrowed money from my brother to pay the attorney. Yeah, more debt. That was nice.

Dave Ramsey is not totally wrong on this. But he does exaggerate it a bit.

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Financial Samurai

Kevin, didn’t realize you were a bankruptcy counselor!

May I ask you something hypothetical?

Let’s say you have $1 million cash in several overseas bank accounts. You are under water on your mortgage by $300,000 and walk away. Can you file bankruptcy in the states and protect your $1 mill cash you could use to pay off your mortgage?

Thnx

Reply

Kevin

They can but most likely won’t just because it can get difficult and not really worth it. Different countries have different laws so they probably wouldn’t even be able too. So if you’re planning that, make sure you’re in a safe haven :)

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Financial Samurai

How about if one is just in the US? Say one has $1mil cash in Bank of America, but has an under water mortgage at Citibank. Can one walk away from the mortgage at Citibank, and still protect the cash in Bank of America?

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Kevin

You get a certain amount that is exempt but no the court will take what they need.

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Money Obedience

Failures are just part of life. In our society we don’t have a problem with business failures. It actually keeps our economy very vibrant. So, why do we attach a stigma to personal bankruptcy?

Reply

Kevin

I was always told to learn from my failures. So in order to learn I have to fail.

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Yana

I think filing bankruptcy without good reason is the worst thing one can do. Bankruptcy is acceptable in the type of capitalistic society we live in; it is even encouraged. I don’t see a general stigma attached to it, but I personally think badly of it when I see it done unnecessarily. The civil court system gains, the lawyers gain, and the filer should not be spending money to file bankruptcy if he cannot pay his debts.

Bankruptcy is a good option only when not filing will cause loss. The person who has not filed has power over the collector just as long as he hasn’t filed. Should the collector make a harmful move against the debtor, that debtor has the valid threat of bankruptcy to use.

I recently read that in Minnesota, Debtor’s Prison is coming back. Not exactly, but debtors are being arrested and jailed for contempt of court over debt. Unbelievably, the collectors are using the court system to collect, literally. They are taking the bail money of the jailed debtors. The goal on the part of the collectors is twofold – to take bail money, and gain financial information from the debtor that they do not have. If the debtor does not follow the judge’s command to tell the collector the info necessary to ruin his life, that debtor is in contempt of court. Anyone in that situation should think of bankruptcy, but that would not be possible if he had already used up the option.

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Kevin

Yea i heard about that. Things get crazy when people want their money.

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Dawn

Without bankruptcy I wouldn’t have learned (and continued learning) how to live below my means.. dealing with cash only and then knowing that I don’t want to have to go through it again.

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Kevin

Right, sometimes it takes something bad to happen to us to realize we need to change.

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Hollis Colquhoun

The bankruptcy issue is pretty complicated. It doesn’t wipe out secured debt or federally issued student loans. Most bankruptcy stems from large amounts of medical debt due to unforeseen circumstances. Different states have different rules for what a person is allowed to keep and what assets are exempt. If someone is struggling with debt and can’t make reasonable payments over a long period of time, their credit report is going to be trashed anyway. If that person meets all of the requirements to file a Chapter 7 bankruptcy, this includes passing an income means test and net worth examination, then it is probably best to file for bankruptcy and make a new start. Unfortunately there are several professions where filing for bankruptcy is not an option: a lawyer, financial advisor, soldier, to name a few. A Chapter 7 bankruptcy stays on your credit report for 10 years and you might not be able to buy a home or car (get secured loans) for 2-3 years after filing. Nevertheless, the law is there for a reason-to help people who are in deep trouble with unsecured debt and have no other way out. For people to have too much income or assets to file a Chapter 7, they may elect to file a Chapter 13 bankruptcy, which involves working with creditors to set up a repayment plan for part or most of what’s owed.

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Chris Ariano@Phoenix bankruptcy lawyer

I completely agree with your thoughts and perspective. I have seen clients who suffer medical problems that affect their work all the time. They are so worried about filing bankruptcy and the stigma associated with it that they would risk their health.

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JT McGee

I don’t think bankruptcy is the end of the world, but it’s not always the best option.

I didn’t know that DR was against going into bankruptcy. That really surprises me since he advocates a lifestyle of living without credit. If you’re trying to live without credit, bankruptcy shouldn’t really mean all that much to you.

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From Shopping to Saving

This is really interesting because I, like a lot of people, look down upon bankruptcy and obviously are very afraid to go there if needed. I pride myself on being able to maintain my credit, bills, and all that jazz… but you’re right, sometimes things happen and ignorance causes many to go down this route.

The sad part is that I’ve seen a lot of people (close family friends) file for bankruptcy for reasons because they were just plain stupid or thought they could get away with certain things.

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