In Debt? Consider Bankruptcy. Seriously. – Podcast

If you want to see someone instantly disagree with you, tell them that people that file bankruptcy do better financially than people who don’t and struggle.

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The Two Sides of Money Troubles

When people face unexpected money troubles, it is just math wrapped in emotion. The underlying facts are not judgmental. And the math doesn’t make assumptions or believe common myths.

Difficult financial situations challenge our very core of self-worth and beliefs. Those same debt obstacles can leave us with Financial PTSD, depressed, anxious, and fragile in so many ways.

Trying to make complicated and tough choices at our lowest moments on how to best deal with personal finance troubles are darn near impossible. When you are involved in a debt hole, you just can’t think clearly.

So let’s take the emotions out of the equation for a moment and look at the facts.

Honest Talk About Bankruptcy

Of all the possible factors involved in best dealing with money troubles, the one component that is the most precious is time. Time acts as a tool to drag your problems out and reduce your future financial worth.

By not taking action to deal with debt problems, we waste time and lose the ability to do even better financially in the future.

The majority of bankruptcy filings are Chapter 7 bankruptcy. By filing a Chapter 7 bankruptcy, consumers obtain immediate relief from all collection efforts, including lawsuits, wage garnishments, and direct communications from creditors. Debts are legally eliminated tax-free in about 100 days. It costs about $2,000 or less in legal fees to achieve that result.

Other people delay in taking action to address their situation and let time pass. Doing that just drags out the financial pain and holds them back from getting a fresh financial start.

The Federal Reserve stated, “The individuals who go bankrupt experience a sharp boost in their credit score after bankruptcy, whereas the recovery in credit score is much lower for individuals who do not go bankrupt.”

The Federal Reserve research also found, “insolvent individuals who do not go bankrupt exhibit more financial stress than those who do.”

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Actual Lost Net Worth

When people are in the middle of a debt crisis, they do not think much about the future, but they should.

Letting more time pass before resolving a financial crisis can cost millions of dollars in lost retirement savings.

To show you precisely what people are unconsciously throwing away, I created this online calculator.

The younger you are, the more time impacts your future net worth.

For example, let’s take a 40-year-old who is considering enrolling in a debt relief solution that will cost $800 a month and take five years. The total payments made into the plan will be $61,949.

If they took that same amount and deposited it into a protected retirement account instead during the same five year period, when they retired at 70-years-old, they would have $746,923 saved. And if they had continued making the $800 a month retirement savings payment, their retirement would be worth $1,808,390.

These numbers don’t even take into account any matching retirement contributions you might miss from your employer by not saving.

The Emotional Misdirection

Emotional buttons are a great way to push people to make bad choices. When it comes to bankruptcy, you might hear that filing bankruptcy is against your religious teachings.

If that’s the case, then why do so many churches file bankruptcy?

And what does the Bible say about bankruptcy? Let’s take a look.

We might feel bad because we may not be able to honor our promise to our creditors if we file bankruptcy. But you also have to factor in the impact of unexpected job loss, income reduction, medical, debt, the impact of divorces, etc.

Many things can happen after the credit is accessed. If a farmer plants a crop and rain does not fall in the months ahead, is the farmer a loser or failure? No.

If a person gets a credit card and then is involved in a terrible auto accident and can’t work, does that make the individual a loser? No.

Creditors Take a Very Calculated Risk

When people apply for and get credit, they are entering into an absolute agreement with the creditor that says a monthly payment must be made no matter what happens. The creditor has considered their risk, factored in some loss, and made a decision based on the mathematical probability they will earn a profit on the overall portfolio.

The decisions creditors make to extend credit are based on math. They use credit scores, incomes, credit history, and factor in risk to reach a decision if you are approved for them to put you in debt. No extension of credit by a major creditor is based on emotion.

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When considering how to deal with your situation, you should only think about your unique and specific situation and not get lost in broader arguments.

Points to Keep in Mind

  1. Going into debt is based on math. Getting out of debt should be based on math.
  2. You have a duty to make your monthly payments if you can and a responsibility to your future self.
  3. Throwing away large amounts of potential retirement savings when in an impossible financial situation, makes no logical sense.
  4. When you turn 80 and are broke, you will hate yourself for not making the hard choices when you were 45-years-old and could have saved a million dollars or more for your care and safety by filing bankruptcy.
  5. Rebuilding credit after bankruptcy is ridiculously easy.
  6. I’ve met very few people that intended to walk away from their debt when they took it out. The overwhelming vast majority of people are good people in bad debt.
  7. Filling bankruptcy is a legal right, and you are entitled to a fresh financial start. It is a right listed in the U.S. Constitution.

I’m not telling you to go bankrupt. But what I am saying is you should evaluate and consider bankruptcy as one of your options to dealing with your debt. Don’t avoid thinking about it because of emotions.

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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