Thursday, April 21, 2005

Newsweek BK Article

Readers by now ought to know my views on the bankruptcy reform that's soon to be signed by Dubya. (I'm freakin' all for it.) I don't agree with everything in this new article, but at least it's well-written:

Newsweek: "Bankrupt Way to Do Business"

Remember what I was saying about that now-famous Harvard University bankruptcy study? Guess what study shows up in the Newsweek article above.

From the article:

But according to a Harvard study of bankruptcy, the most thorough ever undertaken, [the debt] deadbeat is the exception. Nearly 95 percent of those who declare personal bankruptcy are swamped by job loss, family breakup, medical problems or some combination. For about half, it's the health-care costs that do them in.

What do you suppose the chances of avoiding bk might be if, say, a credit-card-debt-free individual or family (with some savings) encountered the [job loss / family breakup / medical problems / or combination] cited above? I'd bet on "decent."

The problem here is that that study places too much importance on the chronology of the debt, rather than the financial weight of various types and amounts of it. Suppose Doug Debtor accumulates $25k of credit card debt over 10 years, a manageable mortgage, an auto loan, and maybe $25k of student loans. Then he runs into a job loss which leaves him salary-impaired for four months, or hits a medical sitation that also causes him to take on $4k in medical debts over the last year. Due to cash flow problems, he heads for bankruptcy. The Harvard study (and most media outlets, apparently) blame Doug's financial downfall on "bad luck," and "misfortune," and the sharp whims of Fate. They blame the bk on the job loss and/or medical debts. It is fairly characteristic of a certain segment of our society which fosters "victimhood" at every turn.

I don't buy that argument for a second. No, I choose to wonder about Doug's lack of savings, his lack of foresight, and his lack of control over his spending. Maybe that is really what landed him in bankruptcy court. Plus perhaps his lack of short- and long-term disability insurance.

Think it might be that simple?


— Posted by Michael @ 11:27 AM


I think you're right. Too many people are choosing to live "on the edge". So it isn't at all surprising when what should be a manageable financial crisis pushes them into bankruptcy.

Besides, the bankruptcy bill is being portrayed as virtually ending bankruptcy. That's incorrect. Most people who actually need a fresh start (low income, crushing debt) will still get it. Some others with higher incomes may have to pay back a portion of their debts under a Chapter 13, but it will usually be a small percentage of the total debt -- with no new interest accruing.

As much as I hate to see credit card companies get what they want, I think this is a step in the right direction.


Joe, I couldn't agree with your (or you also Mike) more. The chronology is the important aspect. On top of this bill I think Congress really should take a harder look (without glancing at their wallets) at some of the marketing tactics of CC companies.


So how long have you been unemployed? I was out of work for 13 months. I was fine on my unemployment, which worked out to about $14 an hour. I was not fine when I had to take an $8 an hour job. I did not have a crushing debt load before this. I'd cancelled all my credit cards and was paying down the balance. Even with a better job, I've gone to half my income. And the bankruptcy did not wipe out my modest student loans. I managed to keep my house only because my aunt made the payments for six months.

If I had been able to tap into my 401k without penalty, like folks who want to buy a house can or those who want to send their kids to college can, I would have been able to make it through without the bankruptcy. I never, ever wanted to go through one. I had so few assets that I could still qualify for Ch 7 since I've always lived a frugal life. I hope that you never have to go through something like that. You may change your mind on how muchis enough to survive a layoff.


Let me post one last comment: Thanks to having that chapter 7, I do have another chance. I am still struggling to pay the student loans and had to go into another year of non-payment, although I haven't defaulted on them. I've managed to pay the mortgage myself again. I've worked 50 hour weeks for 8 weeks and will have $600 in the savings after this paycheck. I'm working as hard as I can so I can buy a trailer and put the house up for sale. I have not seen anything that makes me feel like I would have had a chance for this recovery under the new bill. I've never felt like a victim. I lost my job at a time when many people in this area were out of work. Even though I had good skills, being a woman in my 50s did not move me to the top of the list and meant I could not do the types of physical labor I did when I was younger.

If I had it to do over, I would have put paying bills on the back burner, put my saving into anything but a 401k, and taken care of myself first. If I had psychic powers, I wouldn't have bought the house (the first one I've ever bought by the way). Sometimes things happen that you didn't foresee and you didn't plan for. That's why the founders of this country set up bankruptcy as a way to have a fresh start. Too bad that only corporations will have that chance now.

** Comments Closed on this Post **

Thoughts on my personal finances, goals, experiences, motivations, and accomplishments (or lack thereof).

My financial life began turning around when I took responsibility for it.
— Dave Ramsey


Start (2005-12): ~$21,900
Currently: $0
[About Our Debt Paydown]


Savings Goal: $15,000
Currently: ~$15,115
[About Our Liquid Savings Goal]