Bankruptcy

NY Times Money Expert Advises Chapter 7 Over Creditor-Sponsored Loss Mitigation Plans

As this New York Times article (free registration required) makes clear, bankruptcy isn’t necessarily the “option of last resort” for those battling crushing debt

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The article quotes a law professor named Ronald Mann as suggesting that the credit industry practices are designed to keep debtors entrapped in the prison of debt, and that most would be better off in a Chapter 7 bankruptcy filing.

But, as others quoted in the article suggest, some are not qualified for a 7 under the rules adopted by the BAPCP Act in 2005. About this, little can be done (besides a good faith argument for special circumstances where they exist). But the other excuse offered against bankruptcy — that many simply “don’t want to file” — that, I believe, can be tempered and must be.

Why don’t people want to file bankruptcy when it would resolve the crushing pressure of debt? Because the entire process has been so thoroughly stigmatized, of course, and many believe the unfortunate fib that filing is morally wrong, somehow, or that it makes the debtor weak of character.

Such a view is reflected in the works of one Dave Ramsey, a financial “guru” whose opinion on bankruptcy is well-documented as being quite negative. My colleague Chuck Newton writes eloquently about Ramsey’s opinion in this post. An excerpt:

His point is that bankruptcy is a “gut-wrenching, life-changing event that causes lifelong damage” … As for the “life changing” aspect of which he objects, I thought that was the whole point of his system and method. To have a life changing affect on who people deal with and eliminate debt. I guess he argues that “lifelong damage” is the difference. But, what is the “lifelong damage” … Is the damage spoken and written of about stigma? Ramsey, as I understand it, filed bankruptcy. There is a stigma to bankruptcy. There is also a stigma in having to reorganize and fight with your creditors for years at a time. The easy part of the equation is that most people cannot deal effectively by themselves with a catastrophic debt problem. How much long range planning, how much individual negotiations with creditors, how much stress can one take?

This is what concerns me about the social stigma placed on bankruptcy filing. The simple fact is, whatever stigma attaches, does so because of societal norms. But what do societal norms say about constantly struggling with debt collectors — about alternatively bargaining with and avoiding the dunning call? Is it not more admirable to face facts, admit that it isn’t working, and protect your family and your assets?

When even the Bible speaks of debt forgiveness as a mandatory and good thing, you have to wonder how we got so judgmental and compassionless. I’d like to think of my job as one small part of a movement to educate and change the societal norms.

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