Thursday, June 3, 2010

Bankruptcy When It's Your Own Fault

Yep, today I'm probably going to tick some people off, but this topic keeps coming up and you should know where I stand. I am truly against filing bankruptcy for debts that somebody accumulated by living beyond their means.

If I create a debt, I feel obligated to pay it back. It might sound cliche, but my husband and I see it as a matter of “honor”…we created the debt, so we need to pay it back.  Coming to a payoff agreement is a mutual decision between the creditor and the buyer, so I’m cool with that. Simply declaring bankruptcy and never paying back what you owe seems wrong. Yeah, you get years of bad credit, but that’s not payment…that’s a consequence of not keeping your word.

I cringe at tv ads and online suggestions that explain to people how to get out of their financial obligations. I know people that work their debts off and wish others would do the same.

When I post about debt, it’s about how to save to get rid of it, not how to declare bankruptcy to make it go away.  I understand life can serve up crappy scenarios like medical problems, job loss, death, etc, but I also know that you should have emergency funds and enough insurance coverage to be able to handle financial emergencies that may pop up along the way. Being prepared for bumps in the road is just as necessary as paying your monthly bills.

So, there you go.  That's my spiel.

Where do you stand?  Does bankruptcy seem like a justified way out?

29 comments:

  1. For me personally, I think that being able to get a "Pass" card on debt is a stupid move by the legal system.

    Now I know that bad things happen to some people that buries them in debt, but I also know people that have declared bankruptcy twice, and I know a few that have walked away from their mortgages too (actually the same group). They shouldn't be able to take advantage of the system like that!

    So the people I know live a better life than I do by being irresponsible, materialistic and selfish. And here is the kicker, 1 of the filers was making a lot more than I was at the time that he filed from bankruptcy...

    Our government and legal system is kind of screwy in regards to these scenarios...

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  2. I am just frustrated with our mindset in general these days. I want to know how we went from my grandma's generation of feeling like they never had enough money and saved like maniacs to being a bunch of indulged babies that walk away from debt. Obviously some people do file bankruptcy for good reasons, but it seems like they are the exception rather than the rule. People would rather spend all their time finding loopholes than working to pay their debts.

    I am with you 100 percent BFS!

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  3. Money Reasons, I know! People who actually are suffering are pretty much being belittled by inconsiderate jerks. People who actually save are pretty much being told that we're silly for not living it up on somebody else's dime. I wish a government or legal system wouldn't need to be involved to make people behave like they have any honor at all...

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  4. Everyday Tips, yeah, the entitled attitudes that some people have is amazing! I know my husband and I are spoiled, but I never would think we're entitled to spend someone else's money and then just walk away. Thanks for the support!

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  5. Corporations can declare bankruptcy. Why not allow individuals to do the same? What other solutions do we have if somebody gets himself in over his head? Should we make him an indentured servant for the rest of his life? Besides, the possibility of bankruptcy is the only means to keep lenders somewhat cautious when they pass money to a debtor. Imagine lenders can never lose money on stupid lending decisions. Where would this lead?
    Having said all that, I don't like people declaring bankruptcy any more than you do especially if they live beyond their means. I know a couple who has nicer TVs, more and nicer electronic gadgets, etc than I have and they just came out of bankruptcy. Somehow this feels very wrong to me. But I suppose that they game the system better than I do. Or do they really? I know that I would not want to switch positions with them.

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  6. Money Obedience, I think bankruptcy should exist as an option, I'm just incredibly frustrated at everybody who abuses it. That's exactly why I replied to Money Reasons, "People who actually are suffering are pretty much being belittled by inconsiderate jerks."

    I know that bankruptcy needs to be an option for somebody who encounters serious life problems. I just don't think it should be an option for people who voluntarily drive themselves into consumer debt and have no emergency plan.

    I agree with you, I wouldn't want to switch places with people who file bankruptcy to get away from consumer debt. It just ticks me off that their debt is passed along to people like me through increased costs all the time.

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  7. My biggest complaint is with strategic defaults on a mortgage. People who still have work and just decide they don't want to pay on a $300,000 mortgage because their house is now worth $200,000. If I were a bank, I would sue those people for what they owe.

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  8. Anon, I know! I saw a post about that at Money Reasons and nearly blew a gasket...strategic defaults are the worst...

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  9. I agree the number of people I know that still have high paying jobs and are choosing a short sale just because they want to trade up in homes is shocking and not ethical to me. You made a promise to pay off a loan. Just because the home value has them upside down and they want to move on to me is bogus. I am not ranting about people in tough finacial spots with a loss of income who have no choice.

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  10. I know someone who has filed bankruptcy twice because she lives above her means. She waited until she came out of the first bankruptcy, then had a nose job and breast implants, then filed again. Additionally, she has become the advice-giver to others and has adviced them to file bankruptcy also when they only had a few thousand dollars of death; long story short, they also filed bankruptcy because she made it sound so easy.

    Additionally, this same person enrolls in college, then Master's programs, now Law School in order to live off of student loans. Some people just have no morals and their consequences are coming sooner, rather than later.

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  11. I agree and I appreciate your spunk in saying what so many tiptoe around. There was a time (in my lifetime) when society really looked down on bankruptcy, even for valid reasons (medical expenses for example). But society has changed; the general acceptance of bankruptcy for any reason is a key indicator of just how much.

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  12. I understand your clar annoyance, but how would you prefer the system to work? Most of the time the debt doesn't just go away, there is a pay back portion of bankruptcy and a budget handed down by the Court.

    Some of the stories I just don't believe:
    "She waited until she came out of the first bankruptcy, then had a nose job and breast implants, then filed again."
    "Additionally, this same person enrolls in college, then Master's programs, now Law School in order to live off of student loans."

    Bullshit. That simple. The cost of most Law schools are above the mandated federal amount as such she wouldn't be able to continue.

    "If I were a bank, I would sue those people for what they owe. "

    In some states they can, in some states they can't and the bank knows that before they enter into the mortgage (google Recourse and Non-Recourse mortgage states).

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  13. The story is ABSOLUTELY true! She is the cousin of my co-worker and everyone was wondering how she was living without a job. I don't know anything about Law School, as I have never attended or applied. But, she has sold all of her furniture and told everyone that she is enrolled in Law School in Louisiana and is moving from Arkansas to attend.

    The plastic surgery, she got as soon as the bankruptcy cleared from her credit report.

    Who needs to make up a lie for a comment on a blog?! Be for real...

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  14. I think it's crazy when people follow for bankruptcy and it's clearly them living beyond their means. I guess I hate that we have to pay for it!

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  15. I certainly don't like the idea of someone living beyond their means then declaring bankruptcy. But I don't see an easy 'fix' for the problem.

    Bankruptcy is necessary. We have to have a way for people to get out from under excessive debts.

    I would be ok if they made bankruptcy laws harder. But what would that really do? Protect thee profit margins of banks? Banks build in default risks into their lending.

    We could just make credit harder to get in general but that would punish all of us.

    I agree that its a problem. I just don't see a good solution.

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  16. I feel similarly sometimes...but try to remember that a friend of mine said that most bankruptcies are precipitated by medical bills. And to see the alternative of no bankruptcy, check out books like Little Dorrit by Dickens.

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  17. Whoah. So, I'm guessing all these commenters realize there is more than one way to file consumer bankruptcy? Chapter 7 is for people without a lot of assets who want a fresh start. Chapter 13 requires a repayment plan over 3-5 years and payments are made to creditors through the Trustee's office. You have to beat what's called a "Means Test" to file Chapter 7 and that factors in your income, family size, and geographic area. I hope the above commenter's friend realizes that student loans are VERY difficult to discharge through bankruptcy, if at all, so I hope that's not her plan after graduation from law school.

    I work in a law office that handles consumer bankruptcies, and I have seen all kinds of scenarios. Medical bills for people who don't have health insurance cause BKs, job loss can cause BKs, lawsuits, a failing business...the list goes on and on. I'd say the majority of filers don't have college degrees, but a few of our clients have been professionals (dentists, financial planners (!), and small business owners).

    The Trustees are tough on debtors as well. If you have an inheritance coming, forget about filing BK. If you have fluctuating income...it's gonna be tough. Your 13 will be adjusted and you can be converted from a 7 to a 13 if your situation changes.

    I think it's easy to pass judgment on people, but there are so many factors involved. There are no debtors prisons, but many people think they can be jailed for their debts. I think the majority of filers see BK as their last available option, not a convenient way to rack up more debt.

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  18. Just a quick fyi to all my commenters, I'm actually just venting about the people who rack up consumer debts knowing they "can just file BK" and walk away. I do see bankruptcy as an option for those truly in need.

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  19. I'm with you! Credit is way too easily available though and that only helps fuel the problem, and unfortunately, I do not see that changing.

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  20. I think one of the big problems is that most people don't understand how bankruptcy really works.

    Like Lauren points out if you have enough income then you can't simply disccharge debts. Many people don't realize that. They hear stories on the net or elsewhere about people who pile up giant bills then just walk away and they assume anyone can do that.

    Theres no free tickcet, if you've got money they'll take it.

    Another issue is how your home is treated. The details vary state to state. In some states your home can't be touched by bankruptcy no matter how expensive. In other states your home has zero protection. Many states give partial protection for a certain amount of home equity.

    Student loans are very hard to get rid of in bankruptcy and most cases you can't discharge them.

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  21. Joe, I don’t ever really tiptoe around anything (it’s just not in my nature). BTW, I love the term “spunky”, so thanks!

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  22. Young Mogul, that lady has some major issues. I don’t know which I see as more wasteful; debt, a nose job, or a boob job…unless she was in an accident of some sort or needed cosmetic repair for some other reason (like breast cancer), she’s an idiot. Who gets cosmetic surgery when they’re in debt?! Oh yeah, lots of people…

    I also have to agree with Lauren and Jim R, boob job lady is going to be sadly disappointed if she tries to declare bankruptcy to remove student loan debt. This might be mean-spirited, but HAHA. :-)

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  23. Frugal Scholar, medical bills, disability, and long-term job loss all seem like viable causes to me for bankruptcy (although I wish people would have solid emergency funds for huge one-time med bills…). Iphones and cosmetic surgery lose my sympathy.

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  24. Jim R, I’m just venting that people refuse to control themselves. I don’t know how to change their mindsets to put the consumer goods down until they have the money for them, but that's what I'd wish they'd do.

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  25. Evan, whether or not you believe Young Mogul, you have to admit a whole bunch of people do really dumb things and then file bankruptcy to get out of it…that’s just an easy fact to figure out by simply looking around. I know two acquaintances that filed for bankruptcy even though they make more than us…they simply didn’t think through all the huge expenses they kept financing and making payments on (swimming pool, cosmetic dental work, two nice cars, TWO houses, etc)…these were the people I was thinking of when I wrote the post.

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  26. @Budgeting:

    The person that I speak of really does have some serious issues that she probably needs counseling for. She was abused as a child and had a child removed from her custody (for an incident she could not have prevented). Her cousin is a close friend/co-worker and I know these things because the cousin vents to me about the situation and how worried the family is about her reckless behavior.

    The problem is, everyone in the family knows she needs help but refuses to do an intervention because they are "afraid of upsetting her because she will go off". I, personally, don't get it. Who expects an intervention to be easy?! But, to me, you have to love the person enough to do what needs to be done.

    Her behavior is sad, serious and reckless. The only thing the family is relieved about is that she plans to leave her 4 year old with family when she relocates for school.

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  27. Young Mogul, I feel for everybody involved. That woman needs help. I really wish the best to her 4 year old. I also don't understand how her family can just ignore the problem...

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