Your Thoughts on Personal Bankruptcy

[grantmeaname]

They don't make any money off of people who buy some things on credit and pay it off quickly.

This is factually incorrect. Much of the card servicers' income comes from transaction fees. If you look at American Express, for example, you'll see that their merchant fees are more than double their interest income (and are growing more quickly too)!

Student loans in the US in general can't be bankrupted b/c the govt guarantees them

Interesting theory. Why do yo think private student loans are generally nondischargeable, then?

[Much Fishing to Do]

"Interesting theory. Why do yo think private student loans are generally nondischargeable, then?"

That's a pretty recent thing with private student loans not being dis-chargeable (long after my loans were long paid off), maybe 7 or 8 years ago?  Given the timing I assume it probably came from colleges realizing they had become too expensive for government loans only for most, so they pushed for this as an added incentive for banks to keep making more higher loans so tuition could keep being increased and students could borrow enough to pay it.  Just a guess, somebody on here probably knows the history behind it.

[nobodyspecial]

I've been told that the CC companies make more money off of people with bad credit than those with good

Not true anymore, they make most profit off the fees charged to merchants - customers that pay in full every month are still profitable because they tend to use the card more and so more merchant fees.

[GuitarStv]

I think people would take their financial, health, automotive, relationship, vice, and all other life decisions much more seriously if we still had debtors' prisons.   I'm not saying bankruptcy's an easy way out, but comparatively speaking--it is.

I think that history disagrees with you.  If debtor's prisons led to better financial decisions, there would be nobody in them.  Considering the huge amount of money that people in the prison industry in the US make though, you could probably rally a lot of support for the reintroduction of this form of incarceration.

[libertarian4321]

I think bankruptcy is a tool. It can be used for good (fresh start for whatever reason including poor money management) or bad (fraud). The tool itself opens up opportunities to people who would not have the opportunity. Overall, I feel bankruptcy is good. Creditors are more sophisticated than debtors and know the risk verse reward with lending. Bankruptcy is a risk and is calculated into the agreements that the creditors draft and make the debtor agree to. I refuse to feel sorry for a creditor that entered into a bad contract which they wrote protecting themselves from class action lawsuits using arbitration clauses. A creditor the lends to a previous bankrupt person better make sure the terms of the agreement take in to account the likelihood of subsequent filings. If the creditor cannot figure out how to make money by lending then don't lend.

In a world where very few hold most of the chips bankruptcy is a wildcard on the last hand.

Everyone here is closer to the bankrupt schlub than the big time banker even if you are FIRED. So you should empathize with these people over the bankers.

There is so much wrong with this post, I almost don't know where to start.  Not only are you promoting unethical behavior, you show a shocking lack of understanding of business and economics.

First off, you really are NOT "screwing the big time banker" when you default, YOU ARE SCREWING THE HONEST "little guy" who borrows money.

How is that possible, you ask?  Every time someone defaults, the lenders (bankers) take it into account.  It results in HIGHER INTEREST RATES, HIGHER FEES, and less money availability for everyone who needs a loan (you may not even be able to get a loan- a perfect example of this was the way the lending world cut so many people off in 2008).

The banker can survive the hit.  He won't be hurt much (and if he does take a big hit, he has the political power to get government to bail him out). 

But it hurts the guy who needs a home or car loan or small business loan a lot.  Because some jerks don't pay their bills, everyone pays more on their loans.  If you pay even an extra fraction of a percent on a home loan because of bad debts, over 30-year period, you end up paying a ton of extra money.

Money that you would not have had to pay if the clueless folks who think "bankruptcy screws the fat cat" just paid their damned bills...

First, bankruptcy is ethical as anything in society. Your narrow version of what is ethical is not what society has decided is with its laws. Society has decided that debtors prisons are unethical.

Second, bankruptcy does screw the fat cat because they can only charge an interest rate that the market will sustain. The big bankers are still restrained by market forces just like us little guys, until they get a bailout which I feel there is no political capital to do again in most our lifetimes. If banker X had tons of bad loans they cannot just raise rates to get more profit because banker y was better at managing debt so they can offer a better rate. As to bankers closing markets, if you had good credit in 2008 you could get a loan. Millions of people did including me, at a very good rate.

Lastly, a lack of understanding how to get the best rate or how to use credit effectively is not the bankers fault. Seems like you want to push not finding good rates on to the banker for not providing rather than onto the consumer for not finding. If little guy got a bad loan that cost were high in the recession there are cheap loans now. When you can find an FDIC/NCUA bank/CU account at 3% and get a home loan at 4%-4.5% a car loan for 1%-1.5% the only people hurting are the banks.

Quite blaming people advocating for the debtor, it takes two parties to make a debtor.

"Second, bankruptcy does screw the fat cat because they can only charge an interest rate that the market will sustain."

Correct in that they can only charge what the market will bear.  Incorrect in that "the rich guy is screwed."   

Follow along here:

1.  ALL RATES are higher than they would otherwise be because of dead beats who don't pay their bills.  If you, the "little guy" take a loan at 7%, you are paying a higher rate because of DEAD BEATS.  Lenders have to raise their rates to cover for the dead beats who don't pay their bills.  This hurts YOU far more than it hurts the wealthy lender, who has plenty of other places he can invest his money. If you pay even a 0.5% higher rate on a home loan because of bad debtors, you, the honest "Little guy" who actually pays his debts, would pay an extra $26,343 on a 30-year $250,000 home loan at 4.5% versus 4.0%. 

It ain't the rich investor who is getting screwed here, IT'S THE HONEST BORROWER ("little guy").

2.  Because of dead beats and the risk of future dead beats, lenders simply aren't as willing to lend.  Like I said, rich folks have LOTS OF OPTIONS when it comes to investing.  So what happens is that some of the "little guys" CAN'T EVEN GET A LOAN- whether to buy a house, go to college, start a small business.

So the honest little guy can't get a loan to start a business, or buy a house, or go to school.

Again, the rich guy isn't going to suffer, he's got lots of other investment options.  The HONEST "little guy" is getting screwed by the DISHONEST "little guy." 

You say you have an engineering degree (as do I), this stuff shouldn't be beyond your ability to comprehend.

You still want to ball up your fists, close your eyes, and refuse to see reality?

Try this on for size.

In 2008, we had the worst financial collapse in generations.  People defaulted on loans left and right.

If your naive little theory were correct, the "little guy" would have come out ahead, and the rich folks would have gotten killed.

What happened in reality?  The "little guys" GOT CRUSHED.  They lost their homes.  They lost their jobs.  They lost their families.  Even today, many are working for lower wages (if they have a job at all), and a huge percentage have net worth's below what they were in the summer of '08.  They've been going backward for years.

Rich folks?  We are doing just fine.  We didn't suffer at all.  After taking a temporary paper loss in the market, we watched the market bounce back stronger than ever, and we watched our net worth's soar while the "little guy" is still scraping along, trying to get by.

If you think the "rich guy got screwed" there, you are completely delusional.

Does it sound like I'm being a jerk?  Well, maybe so.  But I'm doing it to knock you out of your fantasy world and into reality.  The quicker you get rid of your naive notions about how the world works, the better off you'll be.

I grew up poor, and I've seen what happens to the "little guy" first hand.  They have little or no control over their lives, and get tossed around like pawns.  Now I'm a multimillionaire, and I've seen up close what happens to the rich when the economy goes bad.

Trust me, son, it ain't us rich folks that get screwed when this stuff happens.  It's the little guy. And the dishonest little guy who doesn't pay his bills does just as much damage to the honest little guy as the rich folks do- maybe more.

I do my best to keep "little guys" from getting screwed.  I volunteer to teach financial literacy, I help people manage their finances for free.  One thing I can tell you for sure is that the people who do the best going forward are those who face the world with a clear understanding of how things really work, and stop operating based on some ridiculous nonsense they heard from their (almost certainly BROKE) friend or co-worker.
 
Also, FWIW, I'm not advocating debtor's prisons because frankly someone in prison sure as Hell isn't going to make good on his debts making 13 cents an hour pounding out license plates.  It's just not good for business. :)

[libertarian4321]

I've been told that the CC companies make more money off of people with bad credit than those with good.  They count on people not being able to pay their bills properly because then they can charge late fees and higher interest rates.  They don't make any money off of people who buy some things on credit and pay it off quickly.  They want you to struggle just enough that they can take advantage of you.  They find ways to keep you hanging on.  That is why they keep giving out credit to those who should not necessarily have it.

They make almost nothing off of people like me (and probably a lot of the folks on this board) who pay their bills in full every month.  They make a small transaction fee off of  our purchases (paid by the vendor), but that isn't where the real money is.

They make some money off the dead beats, but not as much as they could, because the dead beats don't live up to their promises.

The ones they make the most on are the honest, hard working folks who pay their bills, but never seem to be able to pay off their credit card.  They charge high interest rates and fees for years and years and years.  These honest folks pay and pay and pay and pay to make up for the money that the lender loses when a dead beat bales out.

Which is why we on these boards tend to preach constantly that people only spend what they can afford to pay off at the end of the month.  Credit cards are a tool that, if used wisely can be a wonderful convenience.  But use them foolishly, and you'll end up shooting yourself in the foot.

[grantmeaname]

Dude, I just provided a citation that shows they make MOST of their money on transaction fees.

[gReed Smith]

My responses in italics.

"Second, bankruptcy does screw the fat cat because they can only charge an interest rate that the market will sustain."

Correct in that they can only charge what the market will bear.  Incorrect in that "the rich guy is screwed."   

Follow along here:

1.  ALL RATES are higher than they would otherwise be because of dead beats who don't pay their bills.  If you, the "little guy" take a loan at 7%, you are paying a higher rate because of DEAD BEATS.  Lenders have to raise their rates to cover for the dead beats who don't pay their bills.  This hurts YOU far more than it hurts the wealthy lender, who has plenty of other places he can invest his money. If you pay even a 0.5% higher rate on a home loan because of bad debtors, you, the honest "Little guy" who actually pays his debts, would pay an extra $26,343 on a 30-year $250,000 home loan at 4.5% versus 4.0%. 

Prices are set by supply and demand, not the expectation of profits.  Bankruptcies may marginally affect the willingness to lend, but in a world of infinite supply (printed money from the fed), the true determiner of rates on consumer lending is the willingness of borrowers to pay interest.  That is why interest rates are at an all time low after a period of incredible default on loans and mortgages.

It ain't the rich investor who is getting screwed here, IT'S THE HONEST BORROWER ("little guy").

2.  Because of dead beats and the risk of future dead beats, lenders simply aren't as willing to lend.  Like I said, rich folks have LOTS OF OPTIONS when it comes to investing.  So what happens is that some of the "little guys" CAN'T EVEN GET A LOAN- whether to buy a house, go to college, start a small business.

Rich people love consumer lending because it is generally secured lending.  Cars loans and mortgages are fairly safe investments because you can repossess the car or the house.  And, rich people really don't have better options than the rest of us.  Hedge funds underperform the S&P 500 regularly. And, most of the financial crisis was caused because rich people loved lending for houses.  They gave loans to too man "little guys" and that caused too many foreclosures.  I defy you to find one credit-worthy person who cannot get a mortgage, a student loan or a car loan.

So the honest little guy can't get a loan to start a business, or buy a house, or go to school.

Again, the rich guy isn't going to suffer, he's got lots of other investment options.  The HONEST "little guy" is getting screwed by the DISHONEST "little guy." 

You say you have an engineering degree (as do I), this stuff shouldn't be beyond your ability to comprehend.

You still want to ball up your fists, close your eyes, and refuse to see reality?

Try this on for size.

In 2008, we had the worst financial collapse in generations.  People defaulted on loans left and right.

If your naive little theory were correct, the "little guy" would have come out ahead, and the rich folks would have gotten killed.

What happened in reality?  The "little guys" GOT CRUSHED.  They lost their homes.  They lost their jobs.  They lost their families.  Even today, many are working for lower wages (if they have a job at all), and a huge percentage have net worth's below what they were in the summer of '08.  They've been going backward for years.

Much hyperbole here. I assume you don't mean anyone's family was foreclosed upon and sold by a bank? Also, Bear Sterns and Lehman Brothers did not do just fine. Many other bankers did.  Many "little guys" at GM got bailed out by the gov't because their union had political power, while the shareholders and executives were not bailed out. The recession cut a broad path through the economy, and it was more or less up to the political power you could wield, for big and small guys, on whether or not you got rescued.

Rich folks?  We are doing just fine.  We didn't suffer at all.  After taking a temporary paper loss in the market, we watched the market bounce back stronger than ever, and we watched our net worth's soar while the "little guy" is still scraping along, trying to get by.

Many retirees who were not broadly invested in index funds took a bath when their stock picks went under.  I only point this out because I think you're setting up a straw dichotomy between the "rich" and the "poor" with regard to the effects of loan defaults and the recession.  The deadbeats you call out are most often people who suffered medical catastrophes.  I can share some annoyance at people who just got over extended on credit cards and consumer financing, but most bankruptcies are not solely the result of bad spending decisions.

[The Accidental Mustachian]

Does it sound like I'm being a jerk? 

Kind of, yeah.

[goodlife]

I don't see anything morally wrong with bankruptcy. Or with defaulting on credit card companies etc. I mean, it's not like I have ever done either...I have never had debt of any kind...but in principle, a bank lends you money, underwrites the risk and that is how business is done. If you happen to default, oh well, the bank made a bad judgement in extending you credit. I remember when I was an international student in the US, I was flabbergasted at how many credit card offers (or sometimes the actual card) appeared in my mail. I had barely gotten a social security number, had no assets, no ties to the US other than the fact that I was studying there for 4 years...and tons of banks were willing to hand me credit cards left and right! I never used them, but I know of a lot of international students who maxed out their credit cards and then graduated, went back home and never came back. And of course, never paid a dime. But to me, while I am not saying it's right what they are doing, but I also have to say that clearly banks made a really stupid credit underwriting decision....who extends 10k or more of credit to some 20 year olds who have almost no incentive of paying it back? Sorry, but to me, that's just a bad business decision and nothing else.

[Novillero]

Its like taxes, which can't be discharged through bankruptcy.  With the bankruptcy process, the government is not forgiving debts to them, just to everyone else ;-)

This is wrong. Certain taxes can be discharged... Including income taxes.

[Novillero]

As to morality, Deuteronomy chapter 15:2, "At the end of every seven years you must cancel debts."

Proverbs 22:7, "... the borrower is slave to the lender."

And back to Deuteronomy chapter 15 verse 12, "And if thy brother, an Hebrew man, or an Hebrew woman, be sold unto thee, and serve thee six years; then in the seventh year thou shalt let him go free from thee."

There are other biblical quotes justifying the freeing of debts.

Then there is the case of predatory lenders, and there is the argument that the immorality also lies at the hands of lenders: Exodus 22, "If thou lend money to any of thy people that is poor, that dwelleth with thee, thou shalt not be hard upon them as an extortioner, nor oppress them with usuries."

Philosophers from the ancient and Christian world (Plato, Aristotle, Aquinas) have a special word or two on lending money.  Dante's seventh ring of hell are for those who committed acts against God and nature, and included usurers whose penalty is to exist in eternal damnation.

In addition to this Judeo - Christian background is the notion of Islamic finance which finds it immoral to charge any interest on loans (they find ways around it, but that is another discussion - suffice it to say that it is traditionally a cash system).

Simple making money off money has been condemned for thousands of years by many cultures.

But what has also been forgot in this conversation, for big business bankruptcy and charge off accounts are built into the budgets of companies - the expect losses and that a certain percent of borrowers will default.  So, when a system is built around that concept, there seems to be no moral problem with bankruptcy. Bankruptcy abuse by filers is also contemplated by several procedural and criminal safeguards established by the government with the advice from businesses.  The system can always be modified, but the question of morality should be solely limited to abusive filers, IMO.

[coppertop]

I dunno; I have a big problem with people who borrow, knowing all the time that they don't intend to pay it back.  Yes, there are predatory lenders - but that doesn't make it right to default just because they may have it built into their financial plans.  It's theft.  Just because a person is stealing from a large bank or mortgage company doesn't make it okay. 

If a person genuinely gets into trouble through no fault of his own - unexpected layoff, major illness - then I say, yes, discharge his debt; wipe the slate clean.  But this guy I know who is on his second bankruptcy knowingly buys stuff he cannot afford and then does not pay his mortgage.  He brags about taking his kid to the amusement park and she has every Lego set ever made, but he cannot afford to pay his bills.  Something is really rotten there.  He also walks around whining about his situation, expecting handouts - and there are sympathetic people who are fooled once or twice and give him money and other gifts.  Pretty soon they learn, and are no longer fooled - and then he finds other victims to mooch from.  It's been going on for years, and I suspect there are many others out there just like him.  He has an entitlement mentality - nothing is ever his fault.  It's all the mean old banks, insurance companies, and tax man. 

[Candace]

I dunno; I have a big problem with people who borrow, knowing all the time that they don't intend to pay it back.  Yes, there are predatory lenders - but that doesn't make it right to default just because they may have it built into their financial plans.  It's theft.  Just because a person is stealing from a large bank or mortgage company doesn't make it okay. 

If a person genuinely gets into trouble through no fault of his own - unexpected layoff, major illness - then I say, yes, discharge his debt; wipe the slate clean.  But this guy I know who is on his second bankruptcy knowingly buys stuff he cannot afford and then does not pay his mortgage.  He brags about taking his kid to the amusement park and she has every Lego set ever made, but he cannot afford to pay his bills.  Something is really rotten there.  He also walks around whining about his situation, expecting handouts - and there are sympathetic people who are fooled once or twice and give him money and other gifts.  Pretty soon they learn, and are no longer fooled - and then he finds other victims to mooch from.  It's been going on for years, and I suspect there are many others out there just like him.  He has an entitlement mentality - nothing is ever his fault.  It's all the mean old banks, insurance companies, and tax man.

+1

A person who intentionally borrows for non-necessities, knowing he does not intend to pay back their debt, is a deadbeat.

There are plenty of *good* reasons a person might have to declare bankruptcy - medical bills, extended unemployment while putting in good faith efforts to find employment, and others. But the people who are just deadbeats and moochers should be punished. I know and love more than one of these people, and I still think that.

[Mwilliamsrv]

I admit to the Mustasche world that I have chapter 7'ed my consumer debts to consumer debt Valhalla, or wherever they may go. We paid, in a timely fashion, in good faith, on mostly high interest credit card debts for years.  My brother in law is a bankruptcy attorney and suggested we look into filing. We got into trouble in the usual American Dream type way living the lifestyle, albeit in a pared down, no speedboat or new car kind of way, pooh poohed in this forum: kids, house, car, tv's (that Best Buy no interest lure); the general attitude that we deserved the occasional luxury even though we clearly couldn't afford it. Bro in law sold it to us like this: look at it from a business perspective. 
It was not an easy decision to make. I had already discovered MMM and had been paring down the lifestyle, talking with spouse etc., so there was a moral dilemma, a wuss factor, if you will, but we chose the path and used it as a springboard to buckle down, hit those student loans, ramp up the savings (we've got 50,000 give or take in retirement) and stop being so fucking stupid.  It may be a tool for the weak, but it can be used to start building the stash and put the bad decisions behind. I assure you we will not be filing again. Interestingly, the mail is full of pre-selected crap interest credit card offers, some from the very creditors we discharged, offers for car loans and, of course, pay day loans. Getting the mail has become a great source of entertainment for me.
Long winded, but I wanted to get it off my chest and put in my two cents worth. I'm not here to defend bankruptcy on moral terms, just give a personal example from someone who's been there and is continuing to use it to turn the life around.

[CU Tiger]

I think bankruptcy is a tool. It can be used for good (fresh start for whatever reason including poor money management) or bad (fraud). The tool itself opens up opportunities to people who would not have the opportunity. Overall, I feel bankruptcy is good. Creditors are more sophisticated than debtors and know the risk verse reward with lending. Bankruptcy is a risk and is calculated into the agreements that the creditors draft and make the debtor agree to. I refuse to feel sorry for a creditor that entered into a bad contract which they wrote protecting themselves from class action lawsuits using arbitration clauses. A creditor the lends to a previous bankrupt person better make sure the terms of the agreement take in to account the likelihood of subsequent filings. If the creditor cannot figure out how to make money by lending then don't lend.

In a world where very few hold most of the chips bankruptcy is a wildcard on the last hand.

Everyone here is closer to the bankrupt schlub than the big time banker even if you are FIRED. So you should empathize with these people over the bankers.

I think it was in the movie MAXED OUT, Elizabeth Warren told about some of her interviews with people who had filed bankruptcy, that they said it was the worst thing that had ever happened to them. That some of them were so filled with shame and horror about it, that they could barely talk about it. Since it does usually come after a storm of people dunning you for money, calling you at home and work, you staying awake at night trying to figure a way out of your solution.

This of course does not apply to people who don't take their obligations to pay their debts seriously. Some people are dumbasses who abuse the system.

[bsmith]

Bankruptcy sucks ass so bad but the horrifying descent to making that decision is worse. Creditors calling home AND WORK, horror notices showing up daily, etc. It was shaming on a level I didn't know existed and it still embarrasses me today.

I ended up bankrupt after a failed relationship left me with thousands in debt along with newly required child-care expenses. However, just 4 years later I had gotten enough of my sh*t together to qualify for a mortgage on my own, which was amazing as I thought I'd be screwed forever out of buying my own place.

I will not tie my financial well-being to anyone else ever again. I will not rely on anyone else to support me. I made my giant, insanely expensive, foolish mistake and learned from it.

This exact thing happened to me, minus the kids, thank God. It was humiliating, even though it wasn't my fault (spouse hid and charged up credit cards, and even when I found out and stopped that, got the gas card, of all things, and charged that to the max.) I filed right before the rules tightened up, so I got to wipe out all debt in the bankruptcy/divorce. Fortunately, spouse was so bad with money that I offered $2.5k in the divorce settlement and only had to negotiate up to $3k. I got to keep almost six figures in equity in the house. Dipshit. Good riddance.

You're right though, it wasn't so bad filing, it was the stress and anxiety leading up to that decision point that was so bad. I had always paid all my bills, and I prided myself on it.

Like you, I'm not ever tying my finances to anyone else's. The bankruptcy is now off my credit report. I'm debt free and saving now. I'm far behind where I would have otherwise been, though. Lesson learned.

it still embarrasses me today.

I had forgotten about mine until I saw this thread. You'll get past it, and once it's off your report, you can realize that, while you were embarrassed by it in the past, you no longer have to be. What you've accomplished since the bankruptcy shows your character.