If you are like many of my bankruptcy clients, the idea that you need to file Chapter 7 or Chapter 13 may be difficult to accept. I common statement I hear from folks I meet with is “I never in a million years thought I would be talking to a bankruptcy lawyer.”
Over the past 25+ years, I have consulted with or represented men and women I knew from elementary or high school, friends I know from playing basketball, and friends of friends who needed straightforward advice.
I understand fully just how difficult it must be to pick up the phone to call a bankruptcy lawyer, or to send an email to someone you don’t really know to discuss embarrassing and personal financial troubles.
As a bankruptcy attorney, my role is to serve you as a problem solver, not to judge you. If Chapter 7 or Chapter 13 can solve your financial problems, I’ll show you how and why, but if bankruptcy offers little benefit, I’ll tell you that as well.
Further, if your total debt burden is relatively small – perhaps at the $20,000 level or less – I will most likely advise you that bankruptcy most likely does not make sense and that you should focus your efforts on cutting back expenses so you can pay off what you owe.
Bankruptcy Represents Economic Reality
However, when I see a potential filer – individual or couple – with tens of thousands of dollars of debt, or burdensome debts like a house or car worth far less than what is owed, I think that the moral issue about whether to file should take a back seat to economic reality.
First, remember that the laws of the United States (like the laws of all other western democracies) specifically provide for bankruptcy. Bankruptcy functions not as a “free lunch” but as a release valve to allow citizens to avoid what would otherwise amount to debt servitude. A bankruptcy fresh start is a trade off – you lose some access to credit in exchange for a chance to start over.
Second, filing bankruptcy now can return to you the capacity to save for retirement. I do not believe that you would be wise to assume that Social Security will cover all of your financial needs when you can no longer work. I interact with the Social Security Administration regularly as part of my Social Security disability practice and I can report to you with absolute certainty that SSA is a dysfunctional agency. Congress has been cutting SSA’s administrative budget and we are very likely to see ongoing efforts by legislators to limit or even reduce benefits. With Baby Boomers retiring, Social Security cannot support itself as it is currently configured.
If you allocate whatever disposable income you have to paying debt instead of investing in a 401(k) or IRA, you will end up depending on your children or living in poverty. This is also why you should never consider raiding your retirement money to pay credit cards or other debt. Your retirement money is simply more important than debt owed to bill collectors. Congress and state leglistators have codified this preference by making most retirement money exempt (protected) from claims by creditors and bankruptcy trustees when you file bankruptcy.
Third, even if you put a massive effort into paying down debt, there is a good chance that you won’t make much headway. Lenders like credit card companies and loan companies are legally allowed to charge outrageous interest rates on past due debt. If you owe $30,000 in credit card debt and you are subject to a penalty interest rate of 29% it is mathematically impossible for you to pay off that debt in your lifetime.
Fourth, remember that credit card lenders build expected delinquencies into their business models. This is why they charge $35 for a late payment and why they have lobbied Congress to allow for 30% interest rates. Credit card lending in particular is an incredibly profitable business and your decision to file for bankruptcy will not impact Chase, or Citi or American Express’ profits at all.
I advise my clients to make every reasonable effort to pay debt they owe. But math does not lie and sometimes the reality of your financial position calls for bankruptcy.
