bankruptcy
 

I'm not sure why I thought of this, but there have been tons of commericals (on tv and radio) about filing bankruptcy, so I got to thinking...

How does bankruptcy really help someone?

Say for example someone has credit card debt up to 5k, a car loan and student loans. How is bankruptcy really going to help them? Nothing can help you with your student loans (don't even get me started on that BS). Would my fake person have to give their car back? What about the credit cards?

I guess I'm a dork and just wonder about the most random stuff. LOL.

My parents filed bankruptcy like 20 years ago and when I questioned them about it like 5 years ago, they just said that their credit score was pretty bad for like 7 years but with the bankruptcy came like a "new" credit (like wiping the slate clean).

The people I've known who filed bankruptcy were in much deeper than 5K in credit card debt, a car loan and student loans. My next door neighbor had $50K in medical bills and another $50K in credit card debt when she had breast cancer and her husband was dying of liver failure.

A friend of mine's son was hit by a car and ended up in the hospital that was 100 miles from her home for months. She wracked up thousands in credit card debt living in a hotel near the hospital for months. The auto insurance company of the driver and her own health insurance provider were in court for years over who was going to have to pay the medical bills. In the interim, the hospital was coming after her, threatening to garnish her wages, etc. She filed and all that was wiped out.

I know a couple who had $80K in credit card debt and couldn't get divorced because they couldn't afford that debt if they lived separately so they filed bankruptcy first and then split up.

It's a fresh start. If you're looking at debts you can't pay back or you can't even make the minimum payments, bankruptcy stops the actions of all of your creditors in their tracks, bankrupticies, lawsuits, etc., then either restructures your debt so that it's manageable, (there's a formula for it) or if you qualify for Chapter 7, your debt is simply erased.

With credit card debt of $5K, you're better off working something out with your credit card company to get that paid off. Car loan? Sell the car or let the car go back. Better than bankruptcy in most cases.

I would only recommend bankruptcy if your debt situation is just hopeless in the long term. I'd also check out the Dave Ramsey route--a bit simplistic, but it works for a lot of folks.

As for student loans, they're not bankruptable absent pretty extreme circumstances.

Thanks for answering my questions. Like I said, I kept hearing commercials and was wondering what the 'deal' was with it.

I know when I lost my job, unable to find a new one and had a 198K mortgage, I considered bankruptcy. Sometimes I think I should have gone that route instead I ended up with a foreclosure (but now the state of AZ is actually suing my mortgage company, so that is a whole other thread).

The payments on a 5K CC bill would be manageable for most people, unless they're making minimum wage. The only people I know who have filed bankruptcy have done it either because their kids had amassed MAJOR medical bills or it was a financial reckoning as part of a divorce.

Depending on the state, you can keep your house in bankruptcy.

A bankruptcy AND a foreclosure on your credit record would be hard to overcome, at least until those 7 years were over.

A foreclosure is less damaging to your credit record for a shorter period of time than a bankruptcy. Plus, there are a gazillion people with foreclosures now. I know a lot more people who have had foreclosures than bankruptcies.

He gives good common sense advice, has a step-by-step plan, and encourages people to negotiate with creditors to settle bad debts for less than owed -- but ONLY IF you honestly can't pay what you owe. He never wants you to file bankruptcy unless yu are absolutely forced to do so, like if someone sued you and has attached your wages so badly that you can't buy bread. Dave hates debt, and he especially hates student loan debt.

FYI, some guy called in to his radio show the other day and said his wife has $160,000 in student load debt. He wanted to know how they can ever pay it back? Dave said, "Whoa! Who's the doctor?" The guy said it's all his new wife's debt -- $145,000 for a four-year journalism degree, but then she decided that she wanted to cut hair instead, so she went back to cosmetology school with $15,000 more student loan debt. I think he said they make about $60,000 between the two of them. The debt is government guaranteed, so I guess we taxpayers will eventually pay it back to the lender. Ridiculous.

co-sign the Dave Ramsey thing. We've been following his plan for 3 1/2 years and we recently took over teaching the FPU class at my church from the couple who was teaching it before.

I wish bankruptcy wasn't an option... too many people abuse it and don't learn their lesson. Even if you get a ton of medical debt for whatever reason, there are ways to talk to the hospitals and doctors to negotiate a way to get some of the balances waived, and a payment plan for the rest. Dave has described how to do this on his show many times.

Please note: school loans are not forgiven in bankruptcy. As the wife of an attorney who does not advertise....I would be hesitant to use a firm the goes on television. Call your local bar association and ask for referrals.

Your credit rating will tank for a number of years. And yes...some people and/or institutions will try and set up a payment plan.

I differ with Ramsey on that point and that's why I refer to his views as being overly simplistic. Debt should be an investment. Whether you're talking about leveraged buyouts or student loans for degrees which are going to allow you to earn a higher income, debt is not dumb.

I invested around $100K (student loans) in my J.D. I'm about 3 years out of school and have aggressively been working on that debt. I should have it paid off next year, and then will go to work on my home mortgage.

The $160K indvidual, *I think* would qualify for an income-sensitive repayment plan and could have her payments extended out 20 years. I want to say that after 20 years, the debts are forgiven assuming you haven't defaulted.

Maybe for a Chapter 7, but that's about it.

This.

I wouldn't touch bankruptcy with a 10-foot pole. When they changed the Code in 2005, they made the attorney potentially responsible if the client lied in a bankruptcy petition or in any other item submitted to the Trustee or Court. No thanks.

Forgot to add: We know bankruptcy attorneys, my husband has a different specialty.

I am very proud to be a bankruptcy attorney. In the last 3 years alone I have helped a lot of people save their homes through the Chapter 13 bankruptcy. As for my Chapter 7 clients, there are many programs out there to rebuild credit. Many of my clients have qualified for a conventional mortgage 2 years after their their bankruptcy discharge. Does bankruptcy have its benefits... yes. Does bankruptcy have its negatives... yes. Is bankruptcy the right answer for everyone... no. I have had clients from all walks of life. I am not making a ton of money, because obviously my clients don't have a lot of money to pay for services... however, I go to sleep every night knowing that I at least helped one person start over.

Dear Cane: If you thought that I was downgrading bankruptcy attorneys please forgive me. I truly am not in any way doing this. My point was that my husband doesn't do that (and I am not beating the bushes for more work for my husband) but we have a friend or two who do that and (what a surprise) when we get together the men talk business. So, in general: attorneys who advertise may not be your best bet. the bar association is an excellent referral service (at least here).

http://www.youtube.com/watch?v=hiCilTzhXrAI can't believe nobody's posted this yet:

http://www.youtube.com/watch?v=hiCilTzhXrA

Please cite your sources.

Most bankruptcies are medical, and people can not simply "negotiate debts away", as you seem to think. If they *DO* negotiate, it's because the creditor would rather get part of the repayment, rather than getting nothing if the debtor went into bankruptcy. If bankruptcy no longer existed, the debtor's ability to negotiate would all but disappear.

So what would you suggest instead for someone who with a high school degree who gets hit with a six-figure medical bill for something totally out of their control? Debtor's prison?

I'm going to have to agree with you there ... 100%. In my market, I find that the attorneys who have the money to advertise on TV are the ones who don't actually do the legal work. They are like mills where the paralegal does all the work. It shocks me when I go to court and I see the attorney asking "Who is Mr Smith?" because they have never before even spoken to the client! I personally believe that if you hire a lawyer, you should get a lawyer. Sounds like your husband thinks the same way. :)

Didn't Romney answer this for us? Borrow money from your parents.

Psh, please, do you feel big and bad now? "Shame on you because you have no compassion for people who might just have a case of bad luck."

The fact of the matter is, bankruptcy IS an option, so me voicing my wish that it wasn't isn't going to change anything. So I don't know why you're so offended, it's not like my wish is going to magically come true. (HPRL anyone?) So there ya go, knock yourself out walking in front of a bus and rack up medical debt for all I care. If you can't afford it, good for you, you have options to get your slate wiped clean.

Here's your cited source you asked for. This is just one example of stupidity.

BTW - I love how you people like to insinuate that I said something I didn't. I didnt say there shouldn't be help for people who legitimately need it. However - people abuse bankruptcy, and I think there should be stricter rules about who qualifies, for why, and how. The abusers rack up debt they don't intend to pay, and then play the "woe is me" card, and get it forgiven.:rolleyes:

There's a difference in people like the dumb girl in the article I referenced, and people who end up with medical debt they had no control over.


*DBB - Well, I guess you're right. Let's keep bankrupcty around so that there is negotiating power. Oh but wait. If bankruptcy wasn't an option, how would those companies get paid? wage garnishments? Last time I checked, they can only do so much. And you can't put the person in "debtors prison" because the person wouldnt be making any money or have the ability to pay back the debt. So what do you suggest?

Medical debt is ridonkulous anyway. If they have the ability to negotiate and forgive as much as they do, then maybe they should lower the prices in the first place. It shouldn't cost $700 for an asprin while in the hospital.

From many of your previous posts, it seems that you made financial decisions that you regret, namely in the form of taking out student loans. While some people do end up taking out far more than they should, the vast majority do not regret their loans and, like Kevin, consider it an investment in their futures.

Just because Dave Ramsey thinks student loans are a "stupid tax" doesn't mean it's true for everyone. Perhaps you took out too much, or perhaps your program wasn't appropriate for such an investment. I took out a nominal amount for graduate school and the payments are a drop in the bucket for me. Due to my income, I no longer qualify for any of the interest rate deductions. The increase in my monthly salary due to having a master's degree from one of the top architecture schools in the world is exponentially higher than my piddly monthly payments. Is that a stupid tax? Hardly!

That said, I don't think they should be discharged in bankruptcy either, unless you're incapacitated and can no longer work (but in most cases, they'd be discharged before you got to that point). Education isn't like a car or a house that can be repossessed.

One person's story is hardly a source for trying to claim that most people abuse bankruptcy. And DBB isn't the one that suggested that we eliminate bankruptcy, so it's not her point to defend and find alternates for. If you're going to say it needs to be eliminated then you're the one that has the burden of suggesting alternate options.

It's great that you think medical debt is ridic. Why not just make medical care free? Wouldn't that be great??

*sigh* Really? This again? Are you still that upset that we disagree about this? Student loans are a stupid tax. They are not an investment. Investments earn you money. Student loans cost you money. You can get a college education without taking out loans. And no, taking out loans so you can learn a skill or gain knowledge to help you "get a better job" is not an investment. Going to school is an investment. Paying for school with debt is not an investment.

It's no secret that I deeply regret my student loans. But I don't have any desire to have them hang around around for 20 years by paying the bare minimum so that I don't have to be responsible for them anymore. Sorry, I have a life to live. And that means livinging extremely frugally right now so I can throw any extra money I have at them to get them out of my life. They are an inconvenience, and I'm taking full responsibility for them. My point in the previous thread is that for young students out there who are worried about their options, there are OTHER options. Debt is not the only option.

Actually, I can afford it just fine, because I am insured through my university, and the taxpayers of Illinois pick up the bill for my healthcare. I'll tell you what, we can get rid of bankruptcy as soon as we have single-payer healthcare.

Other than that, I think AlphaFrog just about covered all the other barely-comprehensible points you made...and let me tell you, AlphaFrog and I agree so rarely that it's safe to say you are pretty out in left field on this one.

Wow...not only is what you're saying barely comprehensible, it's totally wrong. It also seems that you're making all sorts of false assumptions. I, in your words, "have a life to live," as well, and that doesn't involve calling people stupid for making an investment in their futures. For all you know, I could be paying 4X what my monthly payment is just to pay them off...and it's still just not that much. Sorry I thought a little bit more than you did before going to graduate school.

I'd recommend that you take a deep breath and step away from the keyboard before letting your fingers do the walking. While you might have a point that debt is not the only option and that students and their parents should do as much research as possible, your defensiveness, anger, and poorly worded rants don't help.

At least you're willing to admit now that they (student loans) are an option, and not just a tax on your own stupidity.

You seem really bitter about all this.

I can honestly say that there is no way my daughter could attend college without some student loans unless she was going to go part time for 7 or 8 years. For some reason, FAFSA thinks I can afford one third of my income to pay for her college. I can't. In the 7 or 8 years that she was going part time, I would be continuing to feed her, pay for her living expenses, car, car insurance and gas. In fact, we'd have to buy another car. Even if she got a full scholarship to a community college for the first two years, my expenses would be more than I could afford. She'd be better off if I made $20K less or $20K more a year, but I seem to be in this middle place that just screws us. She wants to go college, there will be loans. On the plus side, I have every intention of paying off this year's loans for her. She will still have some big loans next year, but they will drop considerably the next year, when her brother starts college. That's the equivalent of me making $20K less a year.

I think the danger is in stating black and white absolutes. Saying that all student loans are bad or bankruptcy shouldn't be an option at all is too extreme. There are smart ways to do it and not smart ways to do it. There is a lot of gray.

I never said they weren't an option. I said people didn't "need" loans to be able to get an education. And my position hasn't changed on that.

AGAIN, a wishful comment is not magically going to happen. Bankruptcy's not going anywhere, so it's okay, you don't have to panic.

What would you do without all those tax payers? Maybe you should send a thank you note.

There were 123 students in my vet school class and I can count on one hand how many paid for schooling on their own (via their parents or they had previous careers), the rest of us HAD to take out loans-there was no other way. There are not many scholarships offered and no grants. How else would I have done it?? I hated the debt and paid it off as soon as I could (even selling my house-a portion of the profit went towards the loan).

I feel lucky though-I make a good living and feel my debt was a good investment. I do feel sorry for the current students-average debt for vet school has gone up to 150,000-that will be very difficult to pay off. I would not have gone to vet. school if I had been looking at that kind of debt. There is income based repayment now which does help from what I hear. Whether that is fair to the rest of us as taxpayers is another story.

I think some people think that the point of money is to accrue it and let it sit in the bank. Student loans are a pretty good deal. Some bank gives students with absolutely NO credit a lot of money to get an education that exponentially improves their abilities to make back that money and more in the future. Hmmm...sounds like an investment to me. Some investments are made to start business, some are made into people. $100,000 to fund my medical education was a bargain, and I'm paying it back as slowly as I can...because I can, and I don't give a damn. Money doesn't mean that much to me. Having my education, getting through it in the least amount of time and getting on with my life so my family and I can be happy is the most important thing. Paying interest...so what?

I guess it depends on how you feel about debt. I hate it and pay for eveything in cash or if I use credit will pay it off quickly. To me debt=stress, I literally would have anxiety atttacks thinking about my loans. I felt like I was in prison.

The cost of my debt is a drop in the bucket each month. It would cause me more stress trying to pay it off quickly, which is also dumb since it is the lowest financed rate debt you can get. I'd pay off one of my two mortgages before I'd even consider touching my student loan debt. My debt to income level is minuscule anyway. Having debt is not the end of the world. I do agree about the credit cards, though. You should use them to increase you credit rating but pay them off. We use ones with top rated rewards programs (currently Chase Sapphire.)

Loans can go both ways. I personally love my student loans. They allowed me to live comfortably (instead of just sufficiently) while I was in college.

Then, a few months after I graduated, I managed to make enough money to have the ability to pay off the total amount of the loan immediately if I really wanted to. Instead, that money is currently sitting in a rainy day fund and some stocks.

For me, debt is a tool. As long as I'm not trapped by it, it's awesome.

Congratulations on that. I didn't need loans for my undergrad degree either. The music department needed violin players for their orchestra and I was a pretty good one, so I got nearly a full ride. What fiddling didn't earn me, I was easily able to handle with the various jobs I had.

Law school was another story. It started out at around $750/credit hour and ended up at around $1,000/credit hour with all of the tuition hikes over the 4 years I attended part time. At ~$18K/semester and working as a legal assistant, limited by the American Bar Association to 20 hours per week, unless you want to lie to your school and risk expulsion, there is almost no possible way to pay for a legal education as you go.

I did rack up nearly $100K in debt, and while it's a "drop in the bucket" as some say with my increased income, the interest rates tend to be a higher than I'd like them to be, so unlike others, I'm being a lot more aggressive in getting the debt paid.

Not everyone has parents who are willing to loan them that kind of money or to pay that sort of tuition bill. Like others here, my debt is an investment which has paid off big.

When I got my loans, interest rates for federally sub'd loans were at an all time low. I have rates at 3%. As a resident, you can't pay back loans so you defer, and then spread them out to pay over 30 years like a mortgage. When you make low wages for 6 years, you aren't going to pay off a $100,000 loan. A payment on my 30 year loan is a drop in the bucket and causes me not an ounce of worry.

I have some loans 3.5%, some at 5.3%, some at 6% and one at 10.5% and due to not having to do a residency and having a decent income, I'm on a 10-year payout. My minimum payment is over $1,000 per month. Affordable, but I know things would be a lot better with that payment gone, so I'm working on that and should have it taken care of next year. I never deferred. I don't think I could have. It's a slightly different scenario, but one that'll work out in the long run.

Perhaps a better question is, what are the other options?

Lets look at the finances.
If you chose to go to a community college for two years first, that would save money. Here, you'd pay around $6000 for a year of community college and books. If you shared an apartment with someone, you could probably get by on $350 for rent, another $100 for utilities, and $300 for groceries/hygiene/paper goods. You'd need a car, insurance and gas. If you bought a used car with a small car loan, you could probably do all that for around $500 a month or $6000 for the year.
Annual costs:
$6000 - school
$4200- rent
$1200- utilities
$3600- groceries
$6000- car
So your costs, at a minimum, because we didn't include any clothes, unexpected expenses, medical expenses, etc. would be $21,000 per year or $42,000 for two years of community college.

If you made minimum wage... approx. $7.00/hr, you'd only have to work 3000 hours a year to cover your expenses, before taxes. Oh wait, working full time is 2080 hours a year. You'd have to find a job making more than minimum wage to cover your expenses.

After two years, you'd still need to transfer to a 4 year college/university. At that point, school costs would double.

I don't see how you would do this and go to school full time. If this student goes to school part time, then they can cut the school expenses by $3000/year but they double their living expenses over time. So, in 4 years, they accomplish the same thing and their expenses are $72,000, while working at minimum wage type jobs. And they still have to do two years at a 4 year university somehow. So they take another 4 years to finish their bachelor's degree @ 21,000/year = $84,000. Total spent over 8 years- $156,000. THEN they can start making $17.00/hour.

Alternatively, they could eliminate car expenses, spend $60,000 on a 4 year directional public university, finish in that same 4 years and start making (we'll go conservative, like an entry level teacher in this area) $17.00, 4 years earlier.

So, income goes up by $10.00 for 4 years post college @ 2080 work hours/year= $83, 200 more than you'd make during the 4 years that you would have still been finishing your degree.

So you borrowed $60,000 to earn $83,200. Of course, we need to add interest. A loan calculator provided the following for me:
Loan Balance: $60,000.00
Adjusted Loan Balance: $60,000.00
Loan Interest Rate: 6.80%
Loan Fees: 0.00%
Loan Term: 10 years
Minimum Payment: $50.00

Monthly Loan Payment: $690.48
Number of Payments: 120

Cumulative Payments: $82,857.94
Total Interest Paid: $22,857.94


So our cumulative payments are $82,856.94 if paid off in 10 years. But, we make $83,200 more than we would have otherwise. That sounds like an investment to me. If motivated and able, you could work 15 hours a week at minimum wage while going to college full time and reduce your loans by $5460 per year or $21,840 over 4 years.

Loan Balance: $38,160.00
Adjusted Loan Balance: $38,160.00
Loan Interest Rate: 6.80%
Loan Fees: 0.00%
Loan Term: 10 years
Minimum Payment: $50.00

Monthly Loan Payment: $439.15
Number of Payments: 120

Cumulative Payments: $52,697.41
Total Interest Paid: $14,537.41

So then you'd pay $52,697.41 to make $84,000.

That's definitely an investment.

Interest rates are better these days-I have a friend that only has a 2.1% interest on her school loans and has no plans on paying it off any time soon (she graduated in 2002). I had an 8.9% interest rate (went to 7.9% after 4 years of automatic deduction with no missed payments). After paying on my debt for 8.5 years I had paid 60,000$ total with only 10,000 of that going towards the principal. I felt like I was getting no where. One of my collegaues that graduated a few years before me had an interest rate of over 11%.

I can say that my life has changed completely since I got rid of the debt-I am a much happier person and will be able to go part time in a few years:D.

ETA I was on the 30 year Sallie Mae plan. I hate Sallie Mae.

If obsessed over it, I'd be happier having it paid off too. Those loans don't even factor into my thoughts on a monthly basis. It comes out automatically from my checking account. It's part of life as much as paying for water, gas and electricity. I don't think about those things either. I can't see how my life would change one iota if I paid off my debt. My credit score wouldn't change. I already have enough money to spend and save for retirement. That money is my education payment and a heck of a cheap one at that.

P.S. And I pay two of them every month since my husband has an equal amount of debt. Debt is just a number if you have greater potential. If you let the fear of debt, like the fear of anything else in life, take over your life, it can become irrational. Money doesn't make you happy.