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.
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.
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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.