Author Topic: Bankrupt - is a good thing?  (Read 4609 times)

offroad

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Bankrupt - is a good thing?
« on: October 16, 2012, 01:19:47 AM »
There is a unwarranted social stigma about bankruptcy. That it is bad or evil, and you are bad if you declare bankruptcy.

Thinking it is a financial procedure that has to be done, when you have no way to pay off debts in a reasonable lifetime. Given the costs of the debts. 

It will hurt your credit rating, and be used against you by the most exclusive loaning companies, or by lease-rent companies.  It will be used against you by potential new employers as another excuse to exclude you versus your competition.  But did you want to work for, or rent from, these exclusive companies anyway?  Depends on how tough the market is, over the ten year period the bankruptcy will be on your credit record.

If you seek a government job, your security clearance WILL BE in jeopardy if you declare bankruptcy. Even though don't physically see how, it is used to exclude you as a risk to secrecy.

You can still get credit cards. You can still get car loans. Just not the best rate. Which is more encouragement not to get a car loan. Not to get credit cards. This is a good thing.

It's much harder to complete bankruptcy now. Takes maybe three years as you work your way through credit counseling services, to prove you tried to pay back creditors. But sometimes a life changing event happens, like loosing that high paying job, and you have no choice.

So socially and financially it is the right choice for more people than realize it? 

Having a bad credit rating, due to bankruptcy, saves you from your own stupidity about getting bad loans?  Is that not true? 
« Last Edit: October 16, 2012, 01:31:24 AM by offroad »

simonsez

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Re: Bankrupt - is a good thing?
« Reply #1 on: October 16, 2012, 06:31:34 AM »
I wouldn't call bankruptcy evil by any means but it is a pretty negative thing.  It means more was bitten off than could be chewed for whatever fair or unfair reasons.  I'll assume you are talking about Ch. 7 and Ch. 13 for individuals here.  Labeling a person as bad solely due to finances is a bit ad hominem and I don't think declaring some sort of bankruptcy means you can never be highly functioning with finances again but it is serious and does take time to fully recover from.

I don't follow your logic when you say you wouldn't want to work or rent from exclusive companies that would see a low credit rating (due to filing bankruptcy) as a negative anyway.  Is it unfair for prospective employers to view your medium to short-term financial past as possibly negative?  To me, that's life.  Bankruptcy isn't some magical process that makes all your problems go away.  You're trading extreme shorter term difficulties for moderate longer term difficulties.  It has consequences that last for years.  However, I'm sure there are all sorts of jobs that don't require knowing if a person has filed a bankruptcy within X amount of years.

FYI, car loans and credit cards aren't necessarily evil either.  Especially if a goal is to have a good credit rating/history.  I wipe my cc balance every month and use it basically like a debit card.  Only difference is it boosts my credit (my avg debt utilization is <10%) and I get about $250 in rewards cash or gift cards of my choosing.

Yes, I'll agree with you there is some "good" selection bias with bankruptcy and that people that file will be prevented from taking out some questionable loans (or those that file would be more likely to take out questionable loans) since they are denied.  But this is also a chicken and the egg situation, maybe if they were smarter about personal finance to begin with, they wouldn't even need the questionable loan.

I know incredibly unfortunate events can happen that can really shock the system, but that isn't the norm and insurance can mitigate that.  I'm talking on aggregate.

If it's the right choice for people depends on a lot of factors and would have to be handled case-by-case.  Also note, federal student loans cannot be discharged via bankruptcy.  Last thing, it can also be expensive to go through the bankruptcy process.

I just think all options need to be exhausted before bankruptcy is turned to.

offroad

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Re: Bankrupt - is a good thing?
« Reply #2 on: October 16, 2012, 06:43:48 AM »
Understood about student loans.  Not likely to happen to discharge student loans for anyone.

But have read that IF you can prove (which is extremely hard) that you have recieved no financial increase potential (really vague here) from the educational costs, that you can discharge the student loans.    Will admit that I do not know of actually stories of those who are successful.  Maybe if you got a degree in BUGGY WHIP science, and the market changed completely, then you can try to discharge the student loan.


igthebold

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Re: Bankrupt - is a good thing?
« Reply #3 on: October 16, 2012, 06:54:28 AM »
Bankruptcy happens, and so do tough circumstances, but it seems intuitive to me that there's a pretty high correlation between bankruptcy and personal responsibility.

Making up statistics for the sake of argument, if 90% of the bankruptcies are due to personal responsibility, then a potential employer is only going to have a 1 false negative out of every 10 potential hires. That's not a bad hit rate.

It sucks for the 10% who took a calculated risk on, say, a business or investment, and lost out. But that's life.

And it's not just hiring, it's loan underwriting and all the other pain points of having been through bankruptcy. Not 100% guaranteed weed-out factor, but pretty good as weed-out factors go. It's a kind of game.. what should my strategy be to minimize work and maximize results?

As a sidebar on the topic of hiring, the same goes for things like job experience. A super learner who works hard is far more valuable as an employee (in general) than a non-diligent person with experience in a given field. However, if you're doing a request for resumes on Craigslist, are you likely to find the super learner who works hard? No, so you filter on job experience (how would you even ask for the super learning?). You may weed out good candidates, but you'll also weed out a whole lot of bad candidates.

Incidentally, this is one major reason why hiring is so broken. But that's another topic altogether.

simonsez

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Re: Bankrupt - is a good thing?
« Reply #4 on: October 16, 2012, 10:23:24 AM »
Yeah, that makes sense if you can prove your degree has no value.  However, I think it is more likely for a federal school loan to be forgiven after 25 years than it is for it to be proven the degree had no value.

wiferkhart

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Re: Bankrupt - is a good thing?
« Reply #5 on: October 16, 2012, 10:48:05 AM »
It sucks for the 10% who took a calculated risk on, say, a business or investment, and lost out. But that's life.

Yep.  This is what happened to my husband and I 12 years ago.  Our small business tanked and we lost everything.  We started over from scratch.  Dinged, but smarter.

James

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Re: Bankrupt - is a good thing?
« Reply #6 on: October 16, 2012, 11:00:28 AM »
There is a unwarranted social stigma about bankruptcy. That it is bad or evil, and you are bad if you declare bankruptcy.

I would disagree with that statement in this way.  There is a warranted social stigma about bankruptcy.  Often bankruptcy is bad, and it is almost always bad in the sense that the person cannot pay back debt they owe and that they willingly took on.  Sometimes bankruptcy is due to no fault of the borrower and simply from unforeseeable circumstances, in which case it is a blessing and allows the loaner to clear the books and move on.  And there is a lot of ambiguity in the middle. 

I just don't think that much more can be said about bankruptcy being good or bad without a given circumstance.  It's almost always complicated.

Bankruptcy happens, and so do tough circumstances, but it seems intuitive to me that there's a pretty high correlation between bankruptcy and personal responsibility.

There is no morality implication in recognizing correlation.  And there is no reason not to use correlation at times to help determine the best choices to make when other data is lacking.

igthebold

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Re: Bankrupt - is a good thing?
« Reply #7 on: October 16, 2012, 11:06:44 AM »
Bankruptcy happens, and so do tough circumstances, but it seems intuitive to me that there's a pretty high correlation between bankruptcy and personal responsibility.

There is no morality implication in recognizing correlation.  And there is no reason not to use correlation at times to help determine the best choices to make when other data is lacking.

I agree. The hiring manager who uses bankruptcy as a negative isn't making a moral statement (I hope). He's culling the applicant list to make it easier to manage.