Bankruptcy…an easy way out?
Over the past holiday weekend my family stopped by my wife’s parents house for a quick visit. We had a dinner and were able to catch up a little. One of the things that was brought up was that the neighbor girl (who was my wife’s childhood friend) and her husband had just declared bankruptcy.
Actually they declared bankruptcy back in February, but the family just found out about it now. And while it’s not newsworthy that a couple declares bankruptcy, that happens all the time. What makes this case a bit odd in my book is that it seems that it was planned out. They maxed out their credit cards and bought a SUV right before they declared.
Again this type of thing probably happens more often than I think it does (heck, my Dad declared bankruptcy twice). But what I found surprising was that my Mother-in-Law thought it was a good idea.
She views bankruptcy as an easy way to get a clean slate.
My wife and I tried to tell her that it’s not that simple, but when she quizzed us, we didn’t really know what to tell her. She didn’t mind wearing the scarlet “B” on her credit report and future job/loan applications.
“So what?” was her reply.
Here I thought it was common knowledge that bankruptcy was a last resort, not a get out of jail free card. But according to my Mother-in-law (her info is usually quite suspect), this couple is glad they did it. They lost their debt and got to keep their stuff.
So as soon as I got home, I did a google search and wouldn’t you know it, an article by Dave Ramsey came up on the first page:
“Myth: I’ll just file bankruptcy and start over; it seems so easy.
Truth: Bankruptcy is a gut-wrenching, life-changing event that causes lifelong damage.”
Those of you who have read Total Money Makeover will recognize his advice on the subject because it’s taken word for word from the book. The article is fine, but it doesn’t really cover the damage bankruptcy causes.
Another hit on the first page on the search brought up www.bankrupcyinformation.com:
“The stated goal of federal bankruptcy law is to provide the honest debtor with a fresh start.”
Hmmm, I’m starting to see why my Mother-in-law thinks the way she does. I guess I don’t know what to tell her. In a way it is a fresh start, and for certain situations it IS the best option. But there must be some pitfalls to declaring bankruptcy, right?
I know there has to be a Happy Rock reader who can educate me (and the rest of us) on the nitty gritty of bankruptcy. Either with a first hand story, or an account of someone you know who is going/went though bankruptcy.
Is it a clean slate? How has it affected future financial dealings?
Until next time,
-DD
P.S. I know that this might be a painful topic for some people and I understand if you don’t want to share. It’s just that a lot of people are feeling the pinch of the credit crunch and will probably be exploring bankruptcy as an option. So reading some real-life examples might be helpful with this decision.
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No real life experience here but I share your idea that bankruptcy should be the last resort. My feeling is that bankruptcy is there for those families who truly need it. But, if it’s planned, then I think that’s just plain gaming the system.
It’s a tough call because I’ve seen people who have come to that point, and it’s never a pleasant experience.
At the same time, I’m not sure I believe that people are best served with the knowledge that there’s always bankruptcy to give them a “fresh start”. As long as people aren’t forced to accept responsibility for the choices they make, it’s hardly logical to expect them to change their behavior.
I’ve known people that didn’t even feel that they had done wrong in the matter. I know that bankruptcy is a legal remedy, but when do people reach a point where they don’t even feel like they’ve broken their word to someone? I mean, when you accept debt, aren’t you giving your word that you’ll pay it back? Even if it’s a big “evil” credit card company?
Some circumstances are a little different from others. Not every person who goes broke did it by buying SUVs, getting homes that were too extravagant, or by shopping in expensive boutiques. But every bankruptcy can be traced to, at best, some bad choices, and at worst, a complete lack of care or even fraudulent behavior.
How many people would act differently if they knew that the holes that they were digging would last forever?
Most people are just a few instances of bad luck away from Bankruptcy. In my opinion bankruptcy is too easy to declare. I think a judge should decide whether you are bankrupt because unfortuate circumstances, or from years of irresponsibility.
I know that sounds harsh, but my parents went bankrupt when I as in my late teens. It was largely due to my fathers gambling habits. They are doing just fine now. Even after losing their house, they were able to buy a car and other things. Looking back at it from my perspective, it seemed like just a small hiccup in life.
I have a good friend who is taking a “do-over” chapter 13. He sees it as the easier way out. They have compulsive spending problems. He used to work a lot of over time to try to pay down the debt. But now, that they are filing for bankruptcy, his motivation is gone. So, he and his family will take their lumps and move on.
We filed bankruptcy 5 years ago, to be discharged soon, and honestly while we think back on it and wonder could we have done things differently, we are kind of glad that at least we are almost at the end. At the time, it seemed like the right thing to do. We were newly married, I was pregnant, and we had people wanting to garnish our wages, and I had past medical bills that were always lurking around. However, there was no credit card debt, no house that we were behind on. It was all hospital bills, student loans (those were the ones threatening to garnish) and my husbands car loan, as well as a few store credits my husband had from before we met. Those things, all thrown together, made a very scary situation for us. We consulted some friends who went through bankruptcy and had come out better because of it. They now owned a new home, and a decent vehicle. And they were happier and less stressed. So we talked about it, did research, talked to an attorney, and decided to file a chapter 13. Since filing, we have been working hard on our credit. We have credit cards that we use and keep current by either paying off, or putting a large purchase on them (that we debate over for a while, and then make the purchase) and pay more than the minimum balance to pay it off. Frankly, we’ve been told we have pretty good credit in spite of the bankruptcy, and once that is gone, we will be in very good shape. That day will not come soon enough.
I just posted about my bankruptcy experience last week. It wasn’t without any drawbacks but for the most part they’ve been minor. It has been over 10 years since I declared bankruptcy and it has no effect on my life now.
After reading this, and some reflection on my own life, I can’t help but think that financial planning should be a required course in high school. Maybe even two or three courses, and mandatory for graduation from high school. Heck, how about a couple in college? Maybe something like this will help prevent bankruptcies.
Hi
Bankrupty should never be seen as an easy way out. Here in the UK I think the penalties are a little harsher than in the US. I think I am right in saying that there are some (state determined) protections for the bankrupt’s main home (so that it doesn’t have to be sold). In the UK there is no such protection so that the bankrupt’s home often has to be sold.
Whilst I do agree that people should be made aware that they have done something wrong, I do not think it would be in the best interests of society to keep people trapped in a hopeless debt situation for the rest of their lives. We don’t so that to some criminals whose crimes are surely worse than getting into debt?
The affect on the bankrupt’s credit report will usually enforce a period when they cannot borrow which might help them to reform their behavior.
Neil
My sister filed for bankruptsy about 5 yers ago. Just to let you know-my sister and I are night and day when it comes to finances. I’m the frugal one, she’s not.
anyway, she just went crazy with her credit cards. And she had absolutely no problem getting one after another.
So when she filed for bankruptsy, I was amazed that she got it AND within a few weeks, had more credit cards. Sure, her max on quite a few of them are abut $1500.00, but she was able to acquire at least 5 cards after her filing. And she pays (on one card that I know about) 32% interest-and she has to pay interest all the time. She has not learned her lesson very well, BUT the company’s keep giving her the credit cards.
Another downfall to filing for bankruptsy-my sister’s name is on the internet now for bankruptsy filing in her state. So, if you think that not many people will know-think again.
Bankrupcy for many is the only true option to get out of a sticky debt situation. But many people do file bankruptcy when they do not have too. A great alternative to having to go through a bankruptcy is debt negotiation otherwise known as debt settlement. It may not be an easy way out, but it will save the debtor quite a large sum of money and help them become debt free pretty quickly. Avoiding the longer term negative consequences of bankruptyc.
I think what gets lost in this whole discussion about bankruptcy is not whether it is easier or harder after you’ve been through it – but if filing for bankruptcy in the first place is the right thing to do. I know for some people who have huge medical debt, etc, it is unavoidable. But I also think that many people view it too easily as a get out of jail free card. They think that they can get away with behaving irresponsibly, and not have to pay any price for it.
I think we should definitely make it harder to file bankruptcy, and also institute some sort of mandatory personal finance class in high schools to help educate people about sound financial decision making.
So is it easy to file bankruptcy? Probably. Will you come out of it with less debt and problems to worry about? Maybe. Is it the right thing to do? Not necessarily.
These are some of the best comments my posts have ever got. Thank you for taking the time to share your stories.
And while we’re sharing, I’ll share a little too.
In the post I mentioned that my Dad declared bankruptcy twice. Well we didn’t know that until after he passed and we had to go through his stuff. Afterwards his mail was fwd’d to me for awhile, and it was all credit offers. COULDN’T BELIEVE IT!
A thought that may or may not have escaped you is that bankruptcy is especially harsh for government employees who need a security clearance (and this includes military). Having too much debt or even some bad debt and especially a bankruptcy can cause you to lose your security clearance or not even qualify for one to begin with. Too much debt, bad debt, and bankruptcy makes you a target and a potentially less trustworthy employee.
When I sign a mortgage document, a sales contract or an application for credit, it is my word that I will repay that debt. Call me old fashioned, but that means something to me.
When I promise something, I do my darnest to do what I promised – even if is inconvient, stressful, etc. That is for both my professional, personal, AND financial relationships.
There have been times when it looked like too much. I sold stuff, we worked two jobs each, but we never looked at bankruptcy as an option. But we do need health care reform, because medical bills can do you in!
But for the most part, one needs to do the RIGHT thing, not just the EASY thing.
Bankruptcy in Britain has now been reduced to 1 year, instead of the previous three.
Of course, this makes it more attractive for those thinking about going down this route.
Debt has only been a common feature of people’s finances here for the last 10 – 20 years.
Sure, people have had mortgages for and bought their houses before, but the supply of easy credit has been unprecedented in the UK.
I know that there is such a thing as being responsibility for your actions, but take yesterday – I was directly offered credit cards on three separate occasions. Twice via the post, and once in the post office when I only went in there to buy a couple of stamps!
We need better (some!) personal finance lessons at school level.
Ok guys, I thought I would share something that happened to me late last year.
Me and my husband were really feeling the heat with all our expenditure and rising credit each day. Period. Came into play 2 friends. One was my friend and another was my husband’s. My husband’s friend (who had declared bankruptcy himself) somehow managed to make my hubby understand that its time we filed bankruptcy too. My husband agreed! I was not convinced though. Now my friend, (who had gone through the same thing herself) shared with me everything that she had learned when she had faught her way from becoming bankrupt. I came to the conclusion that bankruptcy would be the last resort for us. I am glad my husband realised the same and both of us chose to consolidate all our debts and joined a debt settlement program. Online debt forums were a great help too.
I would suggest people not to take filing bankruptcy as an easy way out. We should rather manage our finance well and the debt burdens would automatically be much lesser.
God bless
My brother filed for bankruptcy five years ago. It DID NOT wipe the slate clean. He ended up paying credit card bills and other bills his divorced wife racked up before their divorce. The judge looked at his income and said well you make good money and your former wife doesn’t…so he had his wages garnisheed for five years. Bankruptcy CAN “follow you” for many many years.
A thought that may or may not have escaped you is that bankruptcy is especially harsh for government employees who need a security clearance (and this includes military). Having too much debt or even some bad debt and especially a bankruptcy can cause you to lose your security clearance or not even qualify for one to begin with. Too much debt, bad debt, and bankruptcy makes you a target and a potentially less trustworthy employee.
I think the government is too soft on bankruptcy. After getting the taxpayers money as bailout, the bankrupt institutions are still run by the same people who are responsible for this present day situation in one way or other.
Reading the article and the comments, I think bankruptcy should be a last resort. There are a lot of consequences that we might have to bear for years. Managing our personal finance is essential so that we can avoid bankruptcy.
After reading this, and some reflection on my own life, I can’t help but think that financial planning should be a required course in high school. Maybe even two or three courses, and mandatory for graduation from high school. Heck, how about a couple in college? Maybe something like this will help prevent bankruptcies.
Bankrupcy for many is the only true option to get out of a sticky debt situation. But many people do file bankruptcy when they do not have too. A great alternative to having to go through a bankruptcy is debt negotiation otherwise known as debt settlement. It may not be an easy way out, but it will save the debtor quite a large sum of money and help them become debt free pretty quickly. Avoiding the longer term negative consequences of bankruptyc.
The worst bankruptcy in the world is the person who has lost his enthusiasm.
In its origin, bankruptcy was established to protect the creditor, but has been changed many times over the years to protect the debtor. Unfortunately so many people have taken unfair advantage over the system and now its even harder for the honest man to get ahead.
I agree, it is life changing. But could change your life in a positive way as well.
Thanks for the post.
In my opinion, bankruptcy isn’t an easy option. However it is an important option for those with no other choice. I would however always encourage people in significant debt to try ever other avenue first, because bankruptcy can not just effect your finances but also it will prevent you from getting certain types of jobs, especially in government or the financial sector.