The famous poem begins, “how do I love thee? let me count the ways”.

But what if it’s not love that we are counting, but loathing?

Let me count the ways I loathe the Motley Fool’s article asking should I file for bankruptcy?

The Fool’s underlying assumption is that people in debt flock to bankruptcy as an “easy way out”, and damage their credit score for seven years or more.

This is so wrong, where do I start?

Who files bankruptcy

No one I’ve met in 38 years as a bankruptcy lawyer arrived in my office on a whim to make their financial life easier with a “get-out-of-jail-free” card.

Instead, they’ve agonized about even considering bankruptcy.  They feel guilty and ashamed. 

Often, they’ve delayed learning about bankruptcy so long that they’ve made their situation even worse.  Not only has their financial situation worsened while they tried to find a way to pay, but their health and their relationships have deteriorated.

The most common triggers for financial distress are job loss; illness; business failure; and divorce.  None are exactly choices made frivolously.

Drowning in debt

The premise of the Fool’s article is that you are up to your eyeballs in bills.  If that’s your situation, the remedies the author proposes are band-aids on a gut wound.

• Get a second job
• Cut your living expenses
• Negotiate with your creditors

All of these suggestions are sound, standing alone.  But they are inadequate remedies for someone truly drowning in debt.

If the rising water is at your knees, fine.  These might work.  But if the water’s at your chin, this is fantasy.

And all of them are offered without discussion of the age, health and family situation of the person in debt.  Neither does the author address the size of the debt and the time required to pay off the debt.   Much less, discuss the ongoing interest on the unpaid balance.

Realities of negotiating with creditors

The logic of a creditor settling for less than is owed, rather than get nothing in bankruptcy, is rock solid.  Only, little logic is found in the collection departments of most creditors.

They’ve heard the threat to file bankruptcy before.  It doesn’t phase them.

And the people you can get on the phone to discuss a reduction in the debt generally don’t have the authority to make the deal, much less the vision to see the benefits of a deal.

Debts get easier to settle the older and stinkier they get.  So, stop paying for long enough and some creditors will come to the negotiating table.

But getting all your creditors to reduce their claims is nearly impossible.

And there’s no discussion of where you’re going to get the money to pay off the reduced debt, nor the time to engage creditors in negotiations.

Protecting the credit score

The utter irony of the Fool’s approach is that you should avoid bankruptcy to protect your credit score!  Truly foolish.

Your credit score is an arbitrary and unregulated construct, created by businesses working for creditors, to measure the cost to you of incurring more debt.

Granted, it’s now used in other enterprises for which it wasn’t designed, and, I would argue, not particularly predictive of whether you’ll pay your rent, for instance, or commit insurance fraud.

Isn’t the point of discussing bankruptcy alternatives to get you out of debt?  Not enable you to get into more debt?

Unaddressed is the current impact of repayment strategies on your credit score.  Suppose to get a creditor to negotiate, you have to stop paying altogether, so they see that your situation is dire.

There’s a hit to your credit score, right there.

And the score won’t begin to improve until all that’s behind you.  No discussion by the Fool of how long that may take.

Living on a financial knife edge

Personal finance writers all tout saving.  Whether it’s an emergency reserve or retirement savings, no ethical financial expert proposes that you spend every penny you have, with nothing in reserve.

Yet the Fool omits any assessment of whether the money spent paying off old debts would be better off creating a financial cushion, which would be possible after a bankruptcy discharge.

My bankruptcy clients too often have neither savings, nor health insurance, nor health care.  I suggest that a better future requires those things, not a robust credit score.

Bankruptcy misrepresented

Finally, the Fool repeats myths about bankruptcy.

The author claims that “your major assets are sold off” in Chapter 7.

Nonsense. Nearly 98% of Chapter 7’s result in no loss of the filer’s assets.

Between exemptions and the lack of real equity, most people in bankruptcy don’t have assets that are saleable by a bankruptcy trustee.  And those who have assets with non-exempt equity, there’s Chapter 13.

In Chapter 13, you keep your “stuff” and essentially buy it back from your creditors, at a discount, over time.

While Chapter 13 is a repayment plan, but that plan may pay little or nothing to creditors, depending on your income, living expenses, or the equity in your assets after a deduction for exemptions.

How Chapter 13 payments are figured

The very debts that the author warns may not be wiped out in bankruptcy are the debts that are paid first from any money flowing through the bankruptcy estate.  The priorities for payment in bankruptcy see that secured debt, recent taxes, and support are paid before the run of the mill unsecured creditor.

Student loans, the bane of many struggling Americans, are the exception.  They aren’t generally dischargeable in bankruptcy, but they don’t have a priority for payment.  Bankruptcy for a student loan borrower may only wipe out other debts, making it easier to pay off student loans.

What does it cost to stay in debt

The Fool is quick to point out that filing bankruptcy costs money.  That in fact is the first of the downsides of bankruptcy that the author highlights.

There’s no mention of the cost, both monetary and emotionally, of remaining in debt.

While the author notes that bankruptcy appears on your credit report for years and is visible to potential employers and landlords, absent is any evaluation of how a credit report full of delinquent, or even just overwhelming debt, impacts those same parties.

Negative information about a debt  can be reported for seven years.  Not so different than bankruptcy.

Your balance sheet matters

When assessing your financial health, your credit score is secondary.  First of all, look at your balance sheet, not your ability to borrow more money in the short run.

Look at the demands on your income, your age, and your prospects when picking a get-out-of-debt strategy.

Understand that your credit heals with time, and a bankruptcy on your record is not a bar to getting new credit.  A recent bankruptcy affects the price you pay for a loan;  a bankruptcy years ago fades in significance.

And that’s why, for many people, I love the fresh start provided by bankruptcy.

More

What Kenny Rogers tells us about getting out of debt

What bankruptcy should cost

Credit heals

Why I love Chapter 13

Life after bankruptcy

CPR has its place when human life is involved. Human life is precious.

But when what’s dying is the legal right to collect a debt?   Not so fast.

You don’t want to breathe new life into an old debt that is legally dead.

Yet you can do that, unintentionally reviving a debt that is legally dead  by giving it new life when it’s approaching its life’s end.

California statute of limitations can be tricky.  I  originally intended in this post to explain the rules around the statutute of limitiations.  I wanted to show you how to keep from unwittingly extending your legal exposure to a debt.

I’ve concluded that the law is simply too complicated and evolving to provide a nuanced, reliable guide so you can avoid screw ups.

So, I’m adopting the Nancy Reagan approach to the statute of limitations.

Just Say No! 

NO, I don’t owe it.

NO, I won’t pay it.

While it may stretch the truth as to whether you owe it, it’s simple and safe.  It keeps you from adding to your exposure to old debts.

Admit nothing.

Avoid extending the statute of limitations

• Make a payment on the debt
• Admit that you owe the debt

Important to note that either of these ways of extending the life of a debt are acts that you, the person who owes the money, take.

The debt collector can’t extend the statute unilaterally.  Only by getting you to do something against your interests is the life of the debt prolonged. Here’s how they try to do it.

Payment breathes new life

Making a payment on the debt is putting your money where your mouth is:  you wouldn’t pay anything if you thought you didn’t owe money.

So payment is seen as proof that you owe the money.

Payment starts the statute of limitations clock running again, from the beginning.

That’s where the debt collector’s request for a “good faith” payment on a debt you can’t pay off at this time is so insidious.  The debt collector cares far less about the amount of that “good faith” payment than he does about the fact that you’ve just extended your legal exposure to the debt for an entirely new period.  What that period is we’ll discuss below.

Admitting the debt is fatal

An admission that you owe the debt, even without payment, can reset the SOL clock.

California law provides that only an admission of the debt in writing can extend the statute:

No acknowledgment or promise is sufficient evidence of a new or continuing contract, by which to take the case out of the operation of this title, unless the same is contained in some writing, signed by the party to be charged thereby, provided that any payment on account of principal or interest due on a promissory note made by the party to be charged shall be deemed a sufficient acknowledgment or promise of a continuing contract to stop, from time to time as any such payment is made, the running of the time within which an action may be commenced upon the principal sum or upon any installment of principal or interest due on such note, and to start the running of a new period of time, but no such payment of itself shall revive a cause of action once barred.  Code of Civil Procedure 360.

Yet there are precious few cases on the subject.

And while traditionally, the statute of limitations that applies to any collection suit was the law of the state where the defendant lives, recent cases make that less certain.  Topping off the uncertainty, the 9th Circuit Court of Appeals recently ruled that in bankruptcy, the statute of limitations of the state whose law applied to the contract controlled, not the shorter statute where the debtor lived.  Sterba

All of which makes saying nothing, or saying no, the safest course of action if you have an old debt that you can’t pay.

Why have a statute of limitations

Pubic policy says we want legal disputes resolved sooner rather than later.  If a lawsuit is involved,  we want the evidence  available and memories fresh.

It’s the legal version of  SNOOZE, YOU LOSE.

A debt collector or a debt buyer has the same statute of limitation as the original creditor.

When does the limitations clock start running

The SOL clock starts running on the limitations period upon the last activity on the debt.  That activity could be a payment on a debt;  it could be a charge on an open account.

If there are neither charges nor payments on a contract debt after that, the period runs for four years in California. 

Once the limitations period has run, the person who owes the debt has a slam-bang winner of a defense if the creditor files a lawsuit to collect. 

More from the FTC on time barred debts.

More here on debt collection lawsuits

  What to do when you’ve been sued

Fighting back against wage garnishment