Bankruptcy is Rarely a Good Option

Posted on August 23, 2012 by Mary Hunt in Dear Mary 11 Comments

Dear Mary,

My son owes $25,000 on credit cards and student loans. He wants to file for bankruptcy. Do you think this is a good idea? Kae, EC blog 

Dear Kae,

Debt-Proof Living

That’s like asking, “Is chemotherapy a good idea?” Well, yes, if we’re talking about treatment for a horrible disease that could save the patient’s life. But is chemotherapy a good idea to treat the flu or a cold? No, of course not. That would be too severe. Bankruptcy is like that.

There are times when bankruptcy cannot be avoided—it is the only option. But not always.

First, your son needs to understand that student loans cannot be discharged through bankruptcy except in very rare instances that involve total disability, for example. So that leaves the credit cards. Next, he needs to know that he may not qualify to file. Over the years, changes in the law have made it more difficult to quality. Last, if he were to qualify, he needs to know that a bankruptcy, like a birth or divorce, remains a public record forever. It can be reported to the credit bureaus for only 10 years, but that doesn’t make it go away. 

Sadly, for most people, bankruptcy is just a bandaid. It doesn’t address the issues that got the person into trouble in the first place. I would much rather see your son buckle down, get serious about his debt and create a plan to pay it off. Then work harder than he’s ever worked to do it.

I would also recommend he visit the website for the National Foundation for Credit Counseling at www.NFCC.org. This highly respected organization offers telephone and online credit counseling, an information-rich FAQ section on their website, tools, resources and a national listing of recommended credit counselors.

Taking responsibility to pay his debts no matter what that requires, will build character and set him up for financial success in the future.

Dear Mary,

What’s the youngest that you suggest giving kids their own money? Brenda, New York

Dear Brenda,

I believe that as soon as a child recognizes that money has value because it buys things, that child can learn age appropriate ways to manage money and make good decisions with it. That can start as young as age six, under adult supervision.

In my new book, Raising Financially Confident Kids, I suggest that parents need to establish family rules of money management that line up with their values. You’ll read in the book about how my husband and I created a financial plan for our kids. The rules were simple. When they got any money, they had to give away 10 percent and save 10 percent. Then they could make their own decisions on how to spend the remaining 80 percent. The only catch was that they had a responsibility list of things we, their parents, wouldn’t pay for. They learned very early they would have live with the consequences of their spending decisions.

How this all turned out is quite a story, but the bottom line is this: The way to raise financially confident kids is to allow them to make their own independent financial decisions while they are still young and living within their parents’ safety net. Here’s a hint: It turned out really well for our family!

Question: Have you ever considered bankruptcy to get out of debt? Why or why not? Discuss below.

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Posted on August 23, 2012 by Mary Hunt in Dear Mary 11 Comments
  • BOBT

    Due to loss of income I was unable to pay my debts. I’ve managed to settle my debts for as little as 15 percent. Yes, my credit score took a hit but a few months late my credit score started climbing back up and I avoided having that bankpruptcy mark for 10 years. They key is to negotiate with creditors around the 6 month mark before the debt is charged off. Meantime ignore all collection calls until close to 6 month and be bold and negotiate negotiate and if it’s not to your satisfaction politely decline. I was also able to get payment terms so for a $8000 debt which I negotiated to $1500, I was able to pay it off in 5 payments of $300. Don’t be intimidated by these people, they are trained to intimidate.

  • bobbi

    No, I was in over my head with a mortgage and accompanying bills when I moved out of my parents house. I had two jobs and was hardly ever home. I barely had enough money for food. But BK was not an option, it had a bad connotation, so I wasn’t willing to do it, never even thought of it. Paid what I could on my bills monthly, cut back on everything..

  • Deb

    I’m sorry but I totally disagree with this. Paying down debt is NOT the highest moral value. Feeding your family, keeping a roof over their heads, and taking care of their medical needs are all obviously much more important than paying down debt (which be definition is the transfer of money from poorer people, who need to borrow, to richer ones, who can afford to make loans).

    The ruling class has suppressed wages in this country for more than 30 years. First all the women had to go to work to keep up, pretty much destroying the American family. Now mothers and fathers have to take more than one job each just to sort of make ends meet. And for what? So we can be in endless wars for oil and so that billionaires don’t have to pay any taxes? It’s not like our taxes pay for free education and health care like in the other much more civilized countries of the world.

    The powers that be have used debt to entrap the American middle class in a vicious cycle from which there is no relief. It is NOT always the moral thing for a poor person to pay a richer one, even if he “owes” the money. The rich owe the poor a lot more than the poor owe the rich. They owe them a decent society that doesn’t impoverish hardworking people by underpaying them and charging them a fortune for what should be human rights like education and health care.

    Paying down debt is NOT the highest moral goal. Check your Bible. All debts are supposed be regularly forgive, so that people are not saddled with perpetual obligations that destroy their ability to have a happy life. There are many moral reasons for NOT paying your “debt.”

  • horsesense

    Way back in 1969, my ex-husband and I filed for bankruptcy and were assured by our attorney that it would only impact our credit for 10 years. Then credit scores were publicized and now most Americans are held captive by these numbers. I do not have credit debt, after being in debt for two thirds of my adult life and I will live under a bridge before I let another morally bankrupt banker get his/her hands on me or my money. My family had a home to live in, food on the table and medical care when they needed it. Deb is spot on, if you live by Bible principals, people care comes first. It also says what will happen to the people who unjustly defraud others out of wages for hard earned work. I just got off the phone with my daughter who does kennel help for a vet and had a new hire with a bachelors degree tell her that she was “too smart to push a floor mop” even when she was hired to help my daughter clean the kennels. I saw this happen at a library I worked at, where they only hired people with masters degrees to do even minor clerk desk work. I left there when I saw where the wind was starting to blow. Now that library is only a stepping stone for people who want to get into the school system in that town. The library ended up paying for master degree help and now has a turn-over of half the staff each year. Who ends up paying for this? Why us little guys of course. Intelligence is not pushing people down, it is lifting them up to stand beside you.

  • NotInDebt

    Why would any of you think that you have the right to take someone else’s money (credit), use it for your own pleasure (that’s what credit is usually used for, something unnecessary), and then not give it back to them? And then blame it on the “rich”. Unbelievable.
    Women went to work for their own selfish reasons (for the most part), not just to make ends meet. People just have to keep up with the Joneses, even though it cannot really even be done, because the Joneses are also trying to keep up with the Joneses!
    People are not living within their means….that is what bankruptcies (for the most part) are all about.

    • Lori

      What century are you living in? Women did not go to work for “their own selfish reasons.” Women work in most cases to help their spouses make ends meet.

      And as for your comment about bankruptcies mostly stemming from people living above their means, again you are grossly incorrect. Most bankruptcies in this country come from overwhelming medical bills and job loss. Not because they are buying luxury goods.

      • poo

        The only person I know who has filed bankruptcy is someone who has no idea how to manage her finances whatsoever. When I asked her how she ended up with no money to pay her rent, she said, “I don’t know… money just went into daily expenses.” Yet when I told her to check her foyer for daily supermarket sales, she ignored me. She prefers to buy what she buys when she wants to buy it – even if it’s just food. So no, she did not make any extravagant purchases to get to a point where she felt she needed to file bankruptcy, but she was extremely undisciplined, in my opinion.

        Another person I know who is thinking of filing bankruptcy is advised to do so by her divorce lawyer. She is the most frugal (cheap) person I know and in this case, it did not help her financially nor did it help her marriage, because she would always look to others for a freebie. Many of her relationships were based on what she can get (for free) out of others, which includes whining sessions in lieu of real counselling help for some of her emotional bondage to past traumas. Eventually her cheapness came back to bite her, because she held on to not one but two condos that turned out to be poor investments and she had banked on her husband’s one income to take care of her.

        Filing bankruptcy is never a good thing, not to me. It means you’ve given up or you’re finally stepping up, but it’s a little too little too late in the game and you ran out of options. It doesn’t matter what the billionaires are doing – we have no control over that. But we live in a capitalistic society, where people have a choice to change their financial situations. Women don’t “have to” work, but we can choose to work, be part of the marketplace and contribute to the family income. What a privlege that is. I know too many inspiring rags-to-riches stories to poo-poo the system in this country, even though it’s not without its faults.

    • summerfest

      I couldn’t agree with you more! Most people seem to be living beyond their means. I think that people who file bankruptcy should have to surrender the items that they can’t afford to pay for. They should also be forced to get a job and have their checks garnished so that creditors can some of it back. To me its just as bad as stealing because they have unpaid for merchandise in their possession. Meanwhile, the rest of us all pay the price for their irresponsibility which isn’t right. These people clearly don’t seem to get it because they still seem to have money management problems in the future. I’m tired of working for other people’s stuff.

  • L. P.

    Bankruptcy doesn’t always solve the problem especially if you got there by spending above your means. Those problems will still be there even if you file. On the other hand if you got there at no fault of your own such as huge medical bills or job loss sometimes it is the only answer, but it is not without negative results. What we need to remember though is that what works and is best for one person is not always what is right for another so judging one another is not for us to do.

  • Y of Indiana

    In 2005, we had to really look at our debt load and make some tough choices. We talked to several people who actually did bankruptsy and all but one regreted doing so. Ok, so what were our options? My husband worked full time, I worked 2 part time jobs, plus was trying to start a business from home. We talked to a credit counselor, found out what our options were and decided to just buckle down and pay stuff off. We started with 2 outstanding medical bills, moved on to a credit card with the smallest balance, paid off both vehicles – all in a years’ time. It wasn’t easy but it sure felt great to not have those hanging over our heads. We cut back or did away with all the extras: we did not eat anything out for that year (and survived fine) by both packing meals and eating healthy at home. No driving unless necessary and then combining any errands with it since we were out anyway. No gifts to family/friends/coworkers for any occaision. We don’t watch TV so there was no cable/satelite to do away with, but we did combine our internet in with our phone bill so that knocked a few more dollars off each month. Paid everything on time so there were no late fees. The next year we paid off another credit card with a bigger balance, and a year later the final credit card. Decided to sell what inventory there was in the business and take whatever we could get for it and cancel those plans. Seven years later, we have a reasonable mortgage and (unfortunetly) have 2 car payments again for good used vehicles, but we drove the other ones until they died and sold them for scrap. We do not have credit cards. I went back to college and now work full time at a job I love and pays well for this area, my husband is at the same job as previous. We continue to stash money away, and keep current on what bills we do have. We are able to give 20% monthly to charities we believe in without it affecting our bill paying power. All I can say is that it is so easy to get into debt, and so slow to get out, but it can be done. Debt is not a place I want to be ever again, and so we really think about our money and how to spend it.

  • taminenator

    I had a lot of medical debt from when I first got ill. I also made some stupid credit card mistakes and I tried to pay both of these for 10 years. No one wanted to deal with me and just kept suing me and getting judgements that they couldn’t collect because I was on Social Security disability. I got so tired of the constant calls of the lawyers that I finally filed for bankruptcy. This removed the judgements and liens from my home and stopped the harassment. My credit score improved 200 pts overnight but I still wish I had never filed. It didn’t removed the collections from my report and I still think it was a bad idea.