A frequent and quiet chorus says people who file bankruptcy have failed in some way, but let’s set the record straight on that myth. It’s not true.
Bankruptcy is the law of the land in many countries. It allows people otherwise tightly gripped by unmanageable debt to find a way to break free of an otherwise impossible situation.
Bankruptcy is not a tool of punishment, but of compassion.
The pathways to deep and problem debt occur for a number of seen and unseen reasons. The typical result is the same though no matter what route led the person to the tragic financial situation. When faced with an impossible situation, which nobody seeks to enter with intent, the choices are either to learn from the mistakes of the past and take action to create a better future, or to intentionally put yourself in a worse financial spot for the future and try to repair the past.
Bankruptcy does not create punishment on all who file. For most in impossible debt situations it eliminates their debt in about 90 days. It gives them a fresh start and a legal second chance to do better.
There is no doubt bankruptcy is a difficult emotional creek to cross for those unprepared to embrace the experience. They feel like failures.
But That’s Just Not True
People that file bankruptcy may not have fully come to terms with their bankruptcy filing but the reality is rather than turn their back and fail, they instead have taken action and made some bold choices to grab the situation by the horns and take some action to make things better.
And there are a number of reasons to make things better. Dealing with debt is not about just focusing on fixing all the mistakes and making amends for all past transgressions. It’s also about setting yourself up for better financial success, building a financial safety net, and preparing for the almost inevitable retirement to comes.
Who is the wisest and more virtuous? The person who spends all their efforts on fixing the past or prudently preparing for a safer financial future?
As a society we accept the fact it is appropriate, when we make a mistake, to admit we made a mistake, apologize, and not do that thing again. Sometimes we do things which emotionally hurt others and we feel sorry, ask for forgiveness, and move forward.
But when it comes to financial mistakes we create a whole new set of expectations that people should return to their financial mistakes of the past and sacrifice their future to repair those mistakes. An apology and doing better is often not thought to be sufficient.
But what can we really do and what is really right.
Let’s take a typical 40 year old couple with $50,000 of unsecured debt who, through no intentional fault of their has wound up in a situation where slowly increasing utilities and taxes along with reduced income have put them in a tough spot. Not only does the couple have to worry about themselves, but the care and safety of their kids as well.
At this point in their lives they have no emergency savings and little accumulated for retirement. Their kids are in high school and will be headed to college, maybe, soon.
The couple has a tough choice to face. They can either limit everything to the bare minimum and live with financial protection for the next five years in an effort to repay the debt or they can file bankruptcy and take action.
Using the calculator below, here is what we learn. If they make payments over the next five years of $1,000 a month which will leave them unable to build an emergency fund and leave them exposed to the slightest misfortune, they will spend about $79,000 to pay off their debt.
If they instead filed bankruptcy and took the same $1,000 a month and saved it in a retirement plan. By the time they retired at age 75, and they don’t make any more payments after the same five year period, they’d have about $2 million dollars saved for retirement. And this is if they invested in a stock index mutual fund, the Vanguard fund has returned 10.77% over the life of the fund.
Try the calculator for yourself.
Debt Repayment Calculator
This calculator demonstrates the future retirement financial loss you may experience when electing to repay your debt with an extended repayment program offered by creditors, credit counseling or debt settlement, rather than intervene on your debt with solutions like bankruptcy which terminate the debt quickly and allow you to resume saving again for retirement.
The calculator solves two problems.
Cost of Payment Plan in Retirement Dollars: This is the value of the retirement funds that you could have invested rather than repay your debt through an extended repayment program.
Future Lost Retirement Value: This is the amount you will lose in retirement from entering into a repayment plan to deal with your debt.
If you want to just see the amount lost from the payment plan, leave the “Monthly Payment After Payment Plan” box at 0.
Here is an example:
Current Age: 25
Monthly Payment: 300
Monthly Payment After Payment Plan: 0
Length of Payment Plan: 5
Rate of Return: 10
Estimated Retirement Age: 70
Cost of Payment Plan in Retirement Dollars = $23,231.12
Retirement Cost of Payment Plan = $1,247,526.55
What This All Means
If you elected to pursue some other solution, like bankruptcy, to discharge your debt quickly, you would not make monthly payments into an extended repayment plan. Those funds could instead be used to save towards retirement.
In this example, if our 25 year old debtor decided to enter into a credit counseling or debt settlement program they would repay their debt but that plan would cost them $23,231.12 in retirement funds that would be worth $1,247,526.55 when they eventually retired.
Current Age: Enter your current age.
Monthly Payment: Enter monthly payment of debt plan.
Monthly Payment After Payment Plan: Enter any payment you expect to make on a monthly basis into your retirement plan after you get out of debt. Leave this as 0 if you just want to see the future cost of lost retirement from a repayment plan.
Length of Payment Plan: Enter the number of years the repayment plan will take.
Rate of Return: Enter the rate of return you anticipate your retirement plan to have. Keep in mind that a good stock index mutual fund can return 10% or more.
Estimated Retirement Age Age: The age you anticipate retiring at.
And if you don’t think worrying about saving for retirement is important, please read The Saddest Avoidable Mistake People Make When Getting Out of Debt.
So Who Really Wins and Loses From Repayment?
Clearly the winners of an extended repayment strategy are either the debt relief company and/or the creditor.
The winners in a chapter 7 bankruptcy is the consumer who wants to get their lives back on track.
Logically, which winner should be the one you do the best for?
Which is More Moral?
Let’s focus the morality argument for a moment. One position some people have is it is more moral to take the next five years to repay the financial sins of the past. But is that at all really true?
How can it be moral or logical to set yourself up prepare to retire poor and leave yourself exposed to a financial emergency just to fix the past?
Is it more moral to instead focus on trying to fix the past even though that means you are a couple of new tires away from a new financial disaster or setting yourself up to retire poor and have to depend on public assistance or family to care for you? Isn’t that instead just shifting the burden to a different time rather than dealing with it?
A recent study found that half of Americans could not lay their hands on $2,000 in cash if they needed it in an emergency. That’s tragic and a crisis!
Bankruptcy Isn’t Failure. It’s Responsibility
Facing your situation head on and coming to terms with the reality of your current situation and deciding to take tough action to alter the future, is not the sign of weakness. It’s the sign of someone who has weighed the options, wants to learn from their mistakes and do better, and be more responsible for their future.
You can click here to find a local bankruptcy attorney and talk to them for free about your specific situation. Get the facts and then you can make an informed and educated decision if bankruptcy is right for you.
If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.You Have Not Failed if You File Bankruptcy by Steve Rhode