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what do you think of bankruptcy?

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I wrote just the other day about a slightly random conversation that I had with someone who had declared bankruptcy a few years ago.

I’m very strongly of the opinion that bankruptcy is necessary for a good economy. Without it, it becomes impossible for people to take business risks and individuals can become mired in debt from which there is no hope of escape.

I am aware that some people think that you have a moral duty to repay the money you owe, as you agreed in the first place. I disagree, and think that as far as commercial credit is concerned, it has nothing to do with morality, but is simply a contract drawn up within the law of the land - which generally includes provision for bankruptcy.

when is bankruptcy a good idea?

When there is no way that you will pay off your debts in your lifetime, regardless of the actions that you take (e.g. you can’t even repay the interest on what’s owed let alone any of the capital) then bankruptcy is likely to be the only solution to your problems.

If you’re forced into bankruptcy by the taxman or by your creditors, then it is by default the way that you are going to have to go.

In general though, you should declare bankruptcy only if it’s in your best overall interests to do so - and people generally need help to find that out.

why bankruptcy is good for debtors

If you are made bankrupt, it’s almost always as the result of crippling debt. People often have the bailiff demands, phone calls from debt collectors and general hassle that can lead people into depression. This is not good, and being made bankrupt is one way of stopping that. Improving the mental health of people is definitely a useful side-effect of bankruptcy laws.

Also if you are made bankrupt - at least in the UK - you are forced to live within your means, and denied access to credit. If you’d never learnt how to do this before, you’d have to now. This period lasts for a couple of years, and in addition, if you can afford to repay some of what you owe then you will have to.

your reactions?

I strongly suspect that most people who read plonkee money, have never been made bankrupt, probably will never need the protection of bankruptcy and are perfectly sensible with their money. This is good. But what is your reaction to bankruptcy?

Given the rules of polite society, if someone tells me that they, or their friend of relative, has been made bankrupt I would feel rude expressing anything other than general muted support. But in addition to being the polite response it’s the one that most fits my own opinions.

It’s true that some people are serial bankrupts. They are doing themselves no favours at all, and probably shouldn’t be given credit by financial organisations. I can’t bring myself to condemn someone who is, in the long run, punishing themselves.

It seems likely to me though, that most people learn from the experience (possibly eventually). And after all, there are lots of people that struggle with debt, learn from it and go on to be financially successful - in fact a bunch of them are fellow personal finance bloggers. Everyone makes mistakes, and most of us make mistakes with money.

Does this mean that I think it’s ok to run up massive debts?

Err no. Actually it’s the running up of debt that’s the problem - and any subsequent burying of heads in sand. Once the debt is there, any method of tackling it that leads to sensible boring finances and works is just fine with me.

I don’t expect everyone to agree, but whether you do or not, please let me know in the comments.

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18 comments for “what do you think of bankruptcy?”

  1. There is a very important missing part to you post.

    What are the consequences ?

    Beside the fact that you will be denied to borrow money for some point and that you will be therefor force to live within your means (which is what you should have done since the beginning) there are other consequences.

    I don’t think I know all of them but at least her is one:

    The FSA is checking for any bankruptcy in your past before authorizing you to work in the banking / finance industry :


    So if you ever want to work in finance … you know you better have to avoid this

    Posted by JF | May 30, 2008, 12:23 pm
  2. Hi Plonkee

    I guess I was guilty of not looking too favourably on those going bankrupt in the past, but I think that was to do with a lack of understanding of both the situation these people have got themselves into and the consequences they have to face.

    Anyhow, having read your two articles, I’m now much more informed, and I’ll be a little more sympathetic in future.

    Posted by Rob Lewis | May 30, 2008, 1:07 pm
  3. As someone who has filed bankruptcy, I can attest that it was not an easy decision, nor a path I chose to ‘avoid my debt’ or to “get out of my debt.”

    Bankruptcies in the US are handled differently than in the UK, but from what I can tell, not that much different (the post BK experience seems to differ).

    I fully admit I made some less than wise money decisions, but what really pushed me to the brink was the wonderful Universal Default clause that kept driving up my interest rate and made it impossible to pay my debts and I had some other very unexpected expenses.

    I had lived on a cash only basis for about two and a half years prior to bankruptcy paying down my debt until the Universal Default really kicked in and my payments on my debt quickly exceeded my income and basic living expenses. Two of my credit cards skyrocketted from 12% to over 28% in interest rate in less than 3 months and the reason given to me “A couple late payments on my car loan a 15 months prior”. My credit card accounts had been bought out by the bank that had my car loan, the credit card company expercised its right of Universal Default. At that point, my car was paid off and had been paid off for over 9 months. Up until that point, I was making progress, small progress, but progress. Things just spiraled down after that.

    I can and do have a bank account, I actually got a used car loan a couple months ago, I will be applying for a secured credit card to help improve my dimsall FICO score. I had to give up my tax return this year, I was lucky, the Trustee did not make me sell my house, that could have happened too.

    There is Chapter 13 Bankruptcy in the US which does put you on a repayment plan, similar to what Plonkee money talks about in the UK.

    There are lots of reasons why folks file bankruptcy. Yup some folks run up money shopping, others have business failures, or have personal guareentees on businesses, have medical problems, all sorts of reasons. When I went to my 341 hearing (the meeting of creditors) there was a young man who looked less than 30, who was filing his SECOND bankruptcy. SECOND one. Will he be back in 10 years to file again? Probably, probably not. Will I be back in 10 years to file, Hell no. The whole process was miserable and I’m just really recovering from it and now able to turn my fiscal life around and bring it back to where it was 10 years ago.

    All I can say, is don’t judge folks too harshly until you know their complete story. I can guareentee you from the comments I’ve gotten on my blog and in my e-mail no one really thinks it’s the easy way out.


    Posted by bouncing betty | May 30, 2008, 2:13 pm
  4. @Rob:
    I’ve always found that when you meet people in those situations, whilst you may still think it is their fault it becomes easier to see how it could have happened and there’s almost always an element of bad luck - this is what helps me to be more sympathetic.

    @bouncing betty:
    In the UK, there is a limited amount of time for which you cannot have a bank account, or at least not easily. As I bet happens in the US, everyone’s financial situation following bankruptcy is slightly different to take into account different circumstances.

    I’m guessing that the Universal Default provision increased the interest rate that you were being charged, I can see how that could easily lead to bankruptcy, and it must have been especially galling since you had already begun to turn your finances around. I’m glad to hear that you are recovering from it now and I’m sure that you can do well in the future.

    Posted by plonkee | May 30, 2008, 6:26 pm
  5. It seems like there are times where there’s just nothing more than can be done. Of course, one of the types of bankruptcy you file over here has some kind of repayment plan…even if you don’t pay back all the money.

    I think as a general rule it provides its own punishment. Fortunately, many people learn.

    Of course, sometimes learning isn’t the problem. In the States there are a lot of health-care related bankruptcies where people even had insurance and savings and in the end the costs were too much.

    Posted by Mrs. Micah | May 30, 2008, 7:43 pm
  6. Bankruptcy is a business transaction, and should not be regarded in any other light. It’s not some sort of disgrace.

    U.S. bankruptcy laws were changed a few years ago at the behest of an extremely predatory credit industry, whose nature is captured nicely by Bouncing Betty’s story. So many people were falling for credit card issuers’ advertising pitches and then getting so far over their heads in debt that they had to declare bankruptcy, the card issuers realized they weren’t raking as much cash off their customers as expected. So they lobbied Congress–and they have a very wealthy and powerful lobby–to make it very difficult, indeed to get out from under debt through bankruptcy.

    As Betty and Mrs. Micah point out, other circumstances lead to bankruptcy in this country, high among them uncontrollable medical costs and piercing the corporate veil. Many Americans are forced into bankruptcy because they either have no health insurance (costs are very high, and even a minor ailment can render you uninsurable in the open market) or because their health insurance fails to cover all the costs of an expensive illness. If there’s any shame to be attached to that, it does not belong to the bankrupt person.

    And IMHO, credit card lenders are, by the nature of the way they operate their industry, predatory lenders. While exercising restraint in using a card is a matter of caveat emptor, the fact still remains that it is the lenders who take advantage of usurious rates and predatory practices that should be–and once were–illegal.

    Posted by Funny about Money | May 30, 2008, 8:02 pm
  7. My husband declared bankruptcy in another lifetime (ie, before he met a woman who rules with an iron fist!). He certainly learned a lesson, and as someone says upthread, bk isn’t walking away as such, it brings its own problems.

    At the end of the day it’s only money. A lot of the judgement I read around the blogosphere (how could you marry someone in debt! and so on) just makes me roll my eyes. But then, like you, I’ve always had a boring and solid financial history, so lack the zeal of the convert.

    Posted by guinness416 | May 31, 2008, 2:01 am
  8. Bankruptcy needs to be part of the system to quickly stop a bad investment from getting worse. Without bankruptcy, businesses and families are allowed to continue throwing good money after bad.

    During a recession, bankruptcies increase until all the bad loans are flushed out. The sooner the better, so that they do not consume any more money, which is desperately needed for new business growth.

    Posted by Curt | May 31, 2008, 4:23 am
  9. Thinking in general, I think that the payment plan aspect of British bankruptcies might kick in more if you have relatively few assets, or you need to keep some of them - the girl in question got permission to keep her car because she lives in a very rural area, and needed it to get to work.

    @Mrs. Micah and Funny about Money:
    As you can imagine, I’m not very familiar with health-care related bankruptcies, but I’d certainly suggest that they fall under the *considerable amount of bad luck* category, rather than actually being the fault of the people involved.

    Certainly the zeal of the newly converted is something I hope I manage to avoid. I guess if you’ve managed to scrape your way out of debt and pay it all off, it’s easy to think that bankruptcy is the easy way out, but everyone’s circumstances are different, and people should be aiming for the best way out for them.

    I agree about the need for bankruptcies to allow a proper economy to flourish.

    Posted by plonkee | May 31, 2008, 11:03 am
  10. I know that bankruptcy is a necessary escape hatch, but I also don’t like it from a philosophical point of view. You’ve agreed to pay something (your choice) and now you’re not going to fulfill your obligation.

    It isn’t as cut and dried as that, but there’s still a lot of people that use the ‘bankruptcy button’ way too early in the game. People that have intentionally racked up a million dollars or more of debt that they KNEW they wouldn’t be able to pay off, then going bankrupt and keeping the big house, most of the belonging, and ’starting over’ again.

    For things beyond your control, it’s a way to prevent total meltdown, if you CHOSE to do the things that got you in the mess, I’ve got a little less sympathy.

    Posted by Randall at CreditWithdrawal | May 31, 2008, 1:28 pm
  11. It was more than a little upsetting to have my interest rates skyrocket. Kicker was I had two late car payments (more than 30 days, bad me I know) and NO late Credit Card Payments. What I found crazy was the CC interest rate skyrocketing after the new bank took over. No consideration was given for my excellent repayment history and lack of use of the card (ie trying and paying down the debt). I was penalized for the late car payments……

    Posted by bouncing betty | June 1, 2008, 11:15 pm
  12. I used to think that people who filed bankruptcy were irresponsible and trying to get out from under agreements they had made. Until I realized I would never get out of debt myself.

    I have been blogging about my upcoming bankruptcy and how I came to the decision to file. My financial woes are a result of buying a house with too high a mortage in a failing economy and selling a product (books) that are not in high demand right now.

    Do you know what the credit card companies call someone who pays their credit card off every month? Deadbeats.

    When I consider how much interest I have paid over my life time, I realize I have cheated no one. And when a bank thinks it’s okay to raise interest rates from, say 8.9 to 29.99 because your payment arrives a day late, I say that’s immoral.

    The banks have fought to make consumers responsible by toughening bankruptcy laws, but they successfully lobbied against any reforms in their own practices. They were forced to raise the minimum payment to 4 percent.

    It’ll be good for me to be denied credit. It never did me any good before. It just let me have a few things earlier than had I paid cash, but I ultimately paid much more for the privilege.

    Bankruptcy is legal and therefore an acceptable solution to a growing national problem.

    Posted by Joanne at Open Mind Required | June 3, 2008, 4:08 am
  13. Well, if you ask me, I do think filing Chapter 13 bankruptcy under certain circumstances makes sense. This is because it implies that the debtor is at least making some efforts to pay off his debts through a repayment plan.

    For further reference on whether filing chapter 13 is at times a wiser decision, take a look at http://www.mortgagefit.com/bankruptcy/foreclosure-chapter13.html



    Posted by Jessica Bennet | June 28, 2008, 9:28 am
  14. I think people have abused it in the past. It is no picnic however. A bankruptcy will stay on your credit for 10 years. I think there are cases of hardship where people experience a hardship to death or illness. In general people don’t want to live by their needs. They seem to want to go for their wants instead.

    Posted by DebtFreeDave | July 25, 2008, 11:55 pm
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