Bankruptcy

On our Money boards there's been a tremendous amount of hand-wringing over bankruptcy lately.

This is not an easy issue, and my column this week won't have easy answers. Bankruptcy is a fascinating subject because it hits on so many of the American values we grew up with without always understanding the implications.

Let me start by saying that this piece is meant to stimulate thought and discussion. Let me also say that I've gone to a bankruptcy lawyer myself, to understand better what would happen to me -- what I'd gain and what I'd lose.

On the gain side: You can get rid of all or part of the debt that's been grabbing at your throat for ... how many years? No more of those crummy creditors' calls. No more wondering whether you'll ever pay off the credit cards (or whether you'll ever be in a position to start saving for retirement.) An end to the turmoil and conflict. An end, hopefully, to the anxiety.

The downside

All right, so much for the so-called gain. Now the downside -- at least as far as I could make out (my lawyer was smart and knowledgeable, but she talked fast; I should have brought a tape recorder). The fact that you've declared bankruptcy will stay on your credit report for 10 years. During that time you may not be able to get even a car loan.

There are different "chapters" or bankruptcy arrangements, and you'd need to find out which one applies to your situation. Chapter 13 requires you to pay off 10 percent of your total debt, and if your income and expenses show you wouldn't be able to do that in five years, you're not eligible.

Chapter 7 gives a complete write-off of certain kinds of debt (credit cards is one of them) but not all kinds.

The state monitors your case. In Chapter 13, for example, you have to come up with a check for a certain amount each month and send it off to a trustee, who then portions it out amongst your creditors. Miss a payment and the whole deal is off. If you suddenly make more money, you're expected to report it to the trustee so they can increase your payments.

IN SHORT, BANKRUPTCY DOESN'T MEAN YOU GET TO FORGO SELF-DISCIPLINE. Not at all.

But is it right?

What has interested me, in watching the boards, is how few people raise the question: How would I feel about myself in the morning? What does it mean to back out of my obligation to pay my creditors what in fact I owe them? That moral issue -- whether bankruptcy is right or wrong -- plagues us.

From Debtors Anonymous I learned not to give a hoot about what other people think of my financial situation (in fact everyone under the sun knows because I wrote a book about it: Maxing Out). I also care little about credit, because at this point I am much more interested in learning to live without credit.

The lure of credit is what got me into trouble in the first place. I kept thinking I was worth (financially) whatever the credit line was on my various cards. Of course I knew that wasn't really true; I just didn't have the moral fiber to live any other way.

So the question I face is: Can it possibly be anything but wrong NOT to pay people what I owe them?

But that brings me to the more ambiguous question of extreme situations. Am I, for example, supposed to starve rather than not pay off every last cent to the credit-card companies? Am I supposed to live in a hovel with one light bulb and no retirement fund for the rest of my life because I screwed up? Most important of all, am I supposed to put my children in jeopardy? (This last is a rhetorical question for me because my kids are grown.)

So here we are, back in gray soup. What to do?

Here -- just for you to think about -- are some of the ideas Debtors Anonymous has about the psychological pitfalls of declaring bankruptcy.

  • The big fix.
    There's no such thing, of course. All bankruptcy really gets you is a little time. Chances are great you're going to end up right back where you began. Why? Because you haven't solved the problems that got you to the threshold of bankruptcy in the first place. (The rate of people who declare a second time as soon as the law permits is constantly rising. Some say it is now as high as 50 percent.)
  • The lure of the fall-back position.
    Once you've gone this route it's hard not to feel as if you have a back door to escape through, should the going get rough again. And eventually the going will get rough. Learning how to plan for -- and get through -- rough times WITHOUT GOING INTO DEBT is part of any serious debt-recovery program.
  • Catastrophe happens.
    That's really why the law permitting people to declare bankruptcy is there: to protect the innocent from total financial ruin. But YOU have to decide what is catastrophe and what is not. People who take advantage of this law so as to continue an addiction are putting themselves in jeopardy. Only YOU know where you fall on the spectrum between catastrophe and self-indulgence.

What about those of us who fall somewhere in between but know the emotional strain is making us feel as if we're going to crack? Is there no respite for us?

In my next column I'll talk about another truly helpful Debtors Anonymous concept: the debt moratorium. This may be the break you need to help you figure out a way not to declare bankruptcy. And still have a life.

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