I really do read all the comments, all the Twitter messages you send me and appreciate the feedback. Over time a common statement I get is about my recommendations is that people think I suggest bankruptcy too often.

For more information on this topic, please see The Truth About The Failure Rates and Completion Rates of Credit Counseling, Debt Settlement, and Bankruptcy.

So Let’s Talk About Bankruptcy

I just saw an email from “Anonymous” that said:

BK seem to the standard answer you give everyone. You must be a BK lawyer. I don’t agree with all the answers you give–my only defense is maybe you’re a BK lawyer.

I am not a bankruptcy lawyer and having lived through bankruptcy myself in 1990 I don’t ask people to consider bankruptcy as an option, lightly. Bankruptcy can be a difficult process, both financially and emotionally. But my increasing recommendations to consider bankruptcy as a logical solution is not based on my love of bankruptcy, but the direct result of ineffective legal solutions other than bankruptcy to allow people to repay their debt in a fair, reasonable, responsible and sustainable way.

America excels at a lot of things and I am proud to be an American but I am also truly disgusted with the options given debtors in the United States.

Unlike in other countries where a binding repayment plan can be created that creditors must honor and the debtor can afford to meet, outside of bankruptcy in the U.S. no such tool exists.

All other options available in the United States, such as debt management, credit counseling, debt settlement, etc. are all voluntary efforts that creditors may or may not participate in. You could make payments for years in a credit counseling program only to have creditor change the terms, sell you account to another creditor, or whatever the creditor wants to do. These approaches are not a legally binding plans and creditors can change their minds, rates and terms before the total debt is repaid.

If other solutions existed in America, like they do in say the United Kingdom, such as the Individual Voluntary Arrangement (IVA) where a repayment plan can be forced on all creditors when at least 75% by value, agree, I’d suggest that more often.

For years in the U.S. I attempted to do the same thing like the IVA. My team and I worked hard to put together a comprehensive bankruptcy alternative repayment plan based on what the consumer could realistically afford, not what the creditor wanted. These plans had the best chance of a successful outcome instead of bankruptcy, but without the power of law behind them, like in the UK, all it took was one creditor to change their mind or terms and the whole plan was scuttled.

Creditors are selfish beasts. They are not concerned about what works best for the consumer in trouble, they only care about getting the biggest slice of the pie, available or not. As it stands now in the U.S. a voluntary only approach means that we are trusting that creditors will act collectively in the mutual best interest of the debtor and other creditors as a whole. Years of experience have taught me that creditors won’t do that voluntarily and even if they do, an economic change or regime change at the bank will end the program. Just look at what creditors are doing right now to their customer by lowering limits and jacking up interest rates. Whose best interest is that for?

So even I have noticed that I have been suggesting bankruptcy at a faster pace. But that is also a byproduct of uncertain economic times. In a down economy I hate to see people launch into a period of forced poverty just to enter a credit counseling repayment plan that is too expensive for them, only to not be able to make five years worth of payments and watch the plan fail and creditors come charging again. If the debtor is in a situation that is marginally sustainable or emotionally destructive, I will suggest that they look at bankruptcy and I won’t feel guilty about it at all, and neither should you.

It is an age old question but is it better to make three years of payments and fail in a credit counseling plan or go bankrupt now and spend three years rebuilding your life. If the debt management plan fails in three years and you wind up going bankrupt, has that three years been wasted? Is it better to force someone to remain in a financial situation that is amplifying their depression, bad relationship, and/or emotional downfall or to help them find a better way to move forward?

You have to ask yourself if debtors need to be punished more than helped. Some will say that bankruptcy is an easy way out and the debtor should be FORCED to repay their debt no matter how many decades it takes, like in Ireland. Others may feel that the debtor deserves a more reasonable solution to get out of debt, like in the UK or maybe bankruptcy in the U.S.

There have been plenty of times when people have said to me that they did not want to go bankrupt and so I suggested that they go try a debt management program knowing that they might not be able to sustain it. But in those times I recognized their denial, they needed to prove that it would not work to themselves, and it would not take long to fail and then they went bankrupt anyway.

If people do decide to go bankrupt, I never want them to look back latter and say they had other options and then feel bad about their bankruptcy choice. I want them to be able to investigate bankruptcy and in those situations, know that it was the most appropriate choice for them, available in the United States, at the time they were suffering.

Steve