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 recent reader email that addresses the issue.
My name is Jodi. I recently signed up to get your newsletters so that I can understand what’s the best way to deal with this subject.
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 more 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 heard from many people agonizing over the moral dilemma of filing bankruptcy. As a result, I’ve gradually arrived at the conclusion that most should think more about what will best serve their financial purposes and less about moral imperatives. This is especially true when it comes to debts like credit cards.
Before I explain why, let’s spend a minute on something simpler: what to do when faced with crushing debt. Check out the following video about rebuilding your credit after bankruptcy.
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 bankruptcy lawyer has already advised that she should file. Granted, this lawyer isn’t objective because the lawyer 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.
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 using 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 — could 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 companies that offer to settle debts, then allow you to make monthly payments until you save up the necessary lump sum. But many are shady and charge high fees. Read more about that option here.
What about your moral obligation?
Years ago, 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 more than 20 years as a consumer reporter, it’s not so black and white to me. One reason: Many lenders expect you to have morals, but demonstrate little 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 about credit quality. Payday lenders, rent-to-own furniture stores and pawn shops deliberately targeting the poorest and least educated in our society.
Many lenders wouldn’t hesitate to use bankruptcy to eliminate any obligation they had 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’s not level. Because while many 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 to give those who deserve it a second chance. More than a million Americans do 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, 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 likely 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, even if you file bankruptcy and later feel bad, there’s no law that prohibits you from repaying a lender down the road. Bankruptcy relieves you of the obligation to repay debts, not the ability.
Got a money-related question you’d like answered?
Drop me a line! Just make sure your question will interest other readers. In other words, don’t ask for super-specific advice. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
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