Ask Stacy: Should I File Bankruptcy? If I Do, Should I Feel Guilty?

A reader has been advised to file bankruptcy but doesn’t feel right about avoiding her debts. Should she feel guilty about filing bankruptcy? Would you?

I get a lot of questions about the best way to get out of debt, but few about the morality of different choices. Here’s a reader email that addresses the issue.

My name is Jodi. I currently owe about $20,000 in credit card debt. I was told by a lawyer that I should file for bankruptcy. I don’t feel right about bankruptcy because it’s my bill and I feel I should at least make an effort with the companies to see if they could lower the amount so that I can consolidate the bills. Can you please educate me as to what would be a better deal for me? Your newsletters are very helpful.

While dealing with debt is pretty cut-and-dried, dealing with the moral obligation to repay a debt is a bit slippery. The type of person you are, your resources and the type of debt you owe all play a part.

Over the years I’ve met many people who agonized over the moral dilemma of filing bankruptcy and many others who never gave it a thought. Before becoming a consumer advocate, I believed that if you borrow money, you should pay it back, period. My opinion is different today. Now I believe, providing you’ve done your best, you should be more concerned about what best serves your financial interests and less about moral imperatives. This is especially true when it comes to debts like credit cards.

When should you file bankruptcy?

Something a bankruptcy lawyer told me in the course of an interview years ago stuck with me: Consider bankruptcy when your minimum payments exceed your ability to meet them.

In Jodi’s case, a lawyer has advised her to file. Granted, this lawyer isn’t necessarily objective since he stands to profit from Jodi’s case. But if the advice rings true to Jodi, she should probably follow it. If not, she should get a second opinion, perhaps from a credit counseling agency or another lawyer.

Important: When you’re reasonably certain you’re ultimately going to have to file bankruptcy, do it as soon as possible. It makes sense financially: If you’re going to have your credit card debt discharged in court, making monthly payments is just throwing good money after bad. It also makes sense emotionally, because the sooner you file, the sooner you can stop staring at the ceiling all night.

From our Solutions Center: Help with credit card debt

What about negotiating with the creditors?

Jodi is wondering if it’s worth a try to call her creditors and see if she can negotiate lower amounts so she can pay her debts. The answer: Sure, why not?

But while she can do it herself, I’d suggest she get a professional to help.

A credit counseling organization can step between you and your creditors, set up a repayment plan and probably get some of your rates reduced and fees waived. Read more about that option here.

A lawyer, like a bankruptcy lawyer, can help you negotiate a lump-sum payment with the creditor. In Jodi’s case, for example, she could offer $10,000 today as payment in full for her $20,000 debt. The obvious problem is she’ll need $10,000.

There are also companies that offer to settle debts. They do this by instructing you to stop paying your creditors and send them the payments instead. When you’ve saved the necessary lump sum, they negotiate the settlement for you. The problem? Many are shady and charge high fees. Read more about that option here.

What about your moral obligation?

As I’ve already said, years ago, to me the answer to the question of “Should I pay my debts?” was simple: Of course.

This is the way I was raised, Jodi was raised and if you had typical parents, you were raised: A person of honor meets his or her obligations. Your word is your bond. A person who reneges on his debts isn’t to be trusted.

But after nearly 25 years as a consumer reporter, this is no longer black and white. One reason: Many lenders expect you to have morals, but exercise few themselves.

I can point to many examples: Credit card companies that double interest rates when you’re a day late with a payment. Banks charging multiple $35 bounced-check fees if you overdraw your account by $2. Tax preparation companies charging triple-digit rates so you can have your tax refund a week early. Mortgage lenders lying on loan paperwork to get unqualified borrowers approved. Payday lenders, rent-to-own furniture stores and pawn shops that target the poorest and least educated in our society.

Giant corporate lenders wouldn’t hesitate to use bankruptcy to eliminate any obligation they have to you. In fact, some of America’s biggest companies routinely use bankruptcy to get out of union contracts, retiree health care and other obligations.

In short, the playing field isn’t level. Because, while most people feel guilt when they fail to meet an obligation, corporations aren’t people. They don’t feel anything.

None of this, of course, relieves you of your moral obligation to act responsibly and do your best. But when your best isn’t good enough, there’s no shame in taking advantage of a system that exists entirely to give those who deserve it a second chance. More than a million Americans use it every year.

The bottom line

If your debt problem arose from something beyond your control, like illness, injury or a job loss, there was absolutely nothing you could do to prevent it, so you have nothing to feel guilty about. Even if your problems arose solely from irresponsible behavior, if you have any sense at all, you’ll hopefully learn not to repeat your mistakes.

Either way, Jodi, you have more than an obligation to your credit card company. You have the obligation to protect your sanity, your future and your family by using the lawful system you support with your tax dollars. If it’s your best path, don’t hesitate to take it.

And remember, should you feel guilty when you file bankruptcy, there’s no law prohibiting you from repaying a lender on down the road. Bankruptcy only relieves you of the obligation to repay debts, not the ability.

Got a question you’d like answered?

A great way to get answers to just about any money-related question is to head to our Forums. It’s the place where you can speak your mind, explore topics in-depth and, most important, post questions and get answers. It’s also where I often look for questions to answer in this weekly column. You can also ask questions by replying to our daily emails. If you’re not getting them, fix that right now by subscribing here.

About me

I founded Money Talks News in 1991. I’ve earned a CPA (currently inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.

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  • Sophie

    I’d like to add that, after a certain point you’ve very likely already paid the lender most, if not all, of the original balance you spent, even if the lender didn’t credit that dollar amount to the principal. Thus, they aren’t losing anything. I am by no means suggesting that anyone go out and spend, spend, spend, all the while intending to file for bankruptcy, but frankly, its such a difficult and harrowing process that no one would choose to go through it without good reason.

    • Lorilu

      Actually, I do know of someone who was planning to file for bankruptcy. In the meantime, they bought stuff like crazy, running up further huge debts. Their rationale was that, after bankruptcy, they wouldn’t be able to get credit, so better to make those big purchases now, and they’d have their toys.

      So, apparently, there are some people who don’t mind the harrowing process, if there’s something to be gained by it.

  • Oma52

    Aren’t there different types of bankruptcies, so that you at least pay something back?

    • Stacy Johnson

      There most definitely are. For individuals, a Chapter 7 wipes out most debt, a Chapter 13 features a repayment plan. I didn’t go into the details in this story.

  • queenie1

    I declared Chapter 13 in 2004 to keep my house (I was two payments behind and the mortgage company would not give any assistance). I stressed about it so bad, even got in trouble at work because it affected my performance. What shocked me was the way the finance companies DOGGED me while I was in the 5 year payment plan. I needed to sell my car, and the finance company would not give me a release of lien, causing THOUSANDS of dollars in attorney charges added onto my bankruptcy. They also repossessed my car AFTER I had already filed (THANK YOU HONDA FINANCE). These companies could not care less about you, they will literally try to destroy your life for a couple of grand. DO not give them your loyalty or consideration in this issue. Take care of yourself, do what you have to do and keep your head held high! (If Donald Trump can do it, so can you). Good luck.

  • jwg1234556789 .

    When someone gets sick or has a spouse that gets sick, that’s when I say something like bankruptcy may be a sad and unavoidable reality. But job loss? Nope. When I got kicked to the curb a few years ago, I took on two jobs that were “beneath me”. I worked 60 hours per week, got dirty every day…and paid my bills. Laziness is no excuse for bankruptcy. There is never honor in bankruptcy and I’d tell Jodi to buckle down, work like crazy, pay those bills off and show her children what decent, honorable people do when times get tough. As a business owner, I now get the bankruptcy notices from those slugs that think the courts can wave a magic wand and they no longer owe me a dime. Regardless of what the courts say, those slugs will go to their graves in debt to me. Pay your bills, my friends. It’s the right thing to do.

    • crazedchef

      There is no honor in business. It is not about honor. Never has been. Businesses are considered “people”….they screw customers over every single day. There is no reason to feel guilty getting rid of predatory debts.

  • jo

    Because of a combination of job losses and serious illnesses, I have thousands of dollars in credit card and medical debts which I cannot pay. I work 50 hours a week at two low-paying part-time jobs. I still cannot earn enough money to meet my basic needs. I have wanted to file bankruptcy for years. Yet attorneys tell me I must pay the fee (about $1000 to $1500) before they’ll file my case. I do not have this money. How can I get help?

    • crazedchef

      Do it yourself. There are all sorts of online help and at the .gov website, all of the forms you need are online. There is no reason to hire a lawyer for a simple Chapter 7 bankruptcy.

  • Michael Smiley Gawthrop

    The way I look at it, is as long as you didn’t intentionally run up the debts for the purpose of filing bankruptcy and walking away, there is absolutely nothing wrong with filing bankruptcy and leaving a few debts high and dry. Banks are a business, and having the occasional customer default is simply a cost of doing business. No one there is going to take it personally, so why should you?

  • Lin Sexton

    There is nothing that will come back to you but if you’ve discharged the debt, they won’t know where to put your money. It would be better to put the money in an emergency fund so that you won’t get into trouble again. If you save for a rainy day you will ride through a storm with more confidence. Don’t make charges that you can’t pay off each month and learn from your mistakes so you can sleep better at night.

  • Stacy Johnson

    There can be. Best not to repay until talking to your attorney.

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