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 40 years as a bankruptcy lawyer arrived in my office on a whim, trying 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.
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.
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.