The Failure of Bankruptcy's Fresh Start

[keepmine]

I've not downloaded and read the entire study but, the abstract supports what many of us keep trying to tell newcomers. Budgeting and living below your means is not enough. You must raise your income or, you're sunk.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=894453

The Failure of Bankruptcy's Fresh Start

KATHERINE M. PORTER
University of Iowa - College of Law
DEBORAH THORNE
Ohio University - Department of Sociology
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U Iowa Legal Studies Research Paper No. 05-46
Cornell Law Review, Vol. 92, 2006


Abstract:
An untested assumption of Chapter 7 bankruptcy is that it rehabilitates debtors for a fresh start in the economy. Using original, longitudinal data, we examine this assumption against the realities of life after bankruptcy. Our findings challenge the fresh start as the theoretical underpinning for consumer bankruptcy relief. We found that just one year after bankruptcy, one in four debtors was struggling to pay routine bills, and one in three debtors reported an overall financial situation similar to, or worse than, when they filed bankruptcy. Our analysis of these data demonstrates that steady and sufficient income is the key to improved post-bankruptcy financial health. Factors that cause household income to decline, such as unemployment and underemployment, illness or injury, and old age, undermine the chances of financial recovery. These data reveal the limitations of bankruptcy as a social safety net and highlight the fragile economic situations of American families. We conclude that bankruptcy is an incomplete tool to rehabilitate those in financial distress, and we suggest adjustments to bankruptcy law and social programs that will improve the ability of consumers to achieve a fresh start after financial failure.

[Granny]

Thank you for the link.

My "Good Daughter" is starting her final semester for her undergraduate degree in interdisciplinary studies and she has to write a 25-30 page paper....anyone want to guess what her topic will be.....The Credit Crisis in America. Yes mom is pushing this topic on her. It's my final chance to teach her about personal financial management. This is the kid that actually listens to me and does what I say and NOT what I did.

She is limited to scholarly articles and this one fits the bill.

Thanks again.

[JRScott]

To beat inflation you need about a 6-7% raise yearly. That's just to stay afloat. (Yes that's higher than the inflation rate of the last decade, however you have to consider the extra taxes you have to pay too )

[Cassiopeia]

I've not downloaded and read the entire study but, the abstract supports what many of us keep trying to tell newcomers. Budgeting and living below your means is not enough. You must raise your income or, you're sunk.

I don't understand this at all. Speaking from the perspective of just having filed Ch. 7.......ALL of my credit card/loan monthly payts are now wiped out. That IS additional, disposable income!

I'm nearing retirement age, have a great job, and truly AM looking forward to a fresh start. I have no means at all of raising my income, other than of course, the yearly raise.

I do buy into the "fresh start" idea, that is what has kept me going through all this mess. If this paper is telling me that I'm wrong.....I'll be just as bad off a year from now than I was before filing BK, I'll scream. NOTHING could be as bad as that.

I don't get it.

Comments?

[keepmine]

The downfall for many is, they don't make enough to finance there lifestyle and supplement their income with credit cards. Even though the debts are wiped out, there is still the pesky bills that we all have-mortgage, auto loan, utilities, food, insurance, etc. These are the folks that are struggling post bk. They can't pay for the basics of their lifestyle on what they earn.

[BKTango]

People need to lower their standards. It's as simple as that. My dh hasn't has a raise in 3 yrs. He's at a plateau and won't get a raise until his turn comes around again. After our discharge, money was still tight because we then had to play catch up with the things we had been ignoring. Now that we have in a way caught back up I can shave quite a bit of savings a month off of our budget. It's just depends on how much we want to save.

Some people need to realize that bk isn't going to do a darn thing for you if you come out of it on the other side still thinking you should have the $700 (ex.) a month car...or the $3000 (ex.) a month house. Those folks will end up right back into debt. When we bought our home we were approved for well over a $100,000 30 yr fixed rate loan....we bought a $38,000 fixer upper in the country. Sure it's small and it needed some care. But hey Ilike my $300 a month payment. Same with the cars I could run out tomorrow and finance a nice, new ride...but I will keep drving my 10 yr old paid for car.

We live in the land of wanters. Those wanters do nothing but obtain things in excess. Some people may need a reality check and realize, that kinda stuff...it isn't important at all, and if they leave bk and still try to hold onto that, they will have a tough time. Basic point is if you truly do not see some sort of improvement in your savings or the ability to save after bk. You might need to look at lowering your standards just a bit. Learn to live on what you earn. Also it's possible that after bk a person does finally have a little money again and starts doing things they haven't been able to do in a long time, like shopping, eating out, taking a small vacation...of course if you use up any money that might get you ahead, someone could come along and say you were no better off. But at least you were living!

We live cheaply (mortgage, cars, don't buy too much junk) so we can live. We can afford to go out to eat whenvever we want, go camping and stuff. You make a choice, either you are going to own a really expensive home and car (actually they own you) and barely afford the cost of living and just get to sit home every weekend and stare at your lovely things...or you can choose to live in a cheaper home, drive a cheaper if not paid for car, and enjoy living life.

That's just my personal opinion. And ONLY my personal opinion. I am not attacking or being judgemental against people.

[Cassiopeia]

The downfall for many is, they don't make enough to finance there lifestyle and supplement their income with credit cards. Even though the debts are wiped out, there is still the pesky bills that we all have-mortgage, auto loan, utilities, food, insurance, etc. These are the folks that are struggling post bk. They can't pay for the basics of their lifestyle on what they earn.

But aren't they the smallest group of BK-ers? Those who were really on the edge of poverty to begin with? Maybe it's a misunderstanding of mine, but I thought I had learned that most folks who file BK are pretty average or above average, when it comes to income.

I'd say I'm average. And right now for the first time I am paying the "pesky" bills on time.....NO late fees. Plus I have some to save, AND accomplish tasks I was not able to do prior to filing, like home repairs, etc.

Maybe it's just me but I thought that article (although I didn't read it all) was pretty depressing. Like someone rained on my parade.

[Minnymouth]

Unfortunately some folks never change their lifestyle or standard of living after filing bankruptcy. They don't try to live within their income. I think this is who this article is about.

Along with filing bankruptcy, getting a fresh start is having the wisdom to use it wisely and not put yourself in the same position again.

You have to change your way of thinking from the "I want that" to "I only need and can afford this"......

If I see something "I want" - I wait 24 hours and see if "I still want" or not...... usually I don't.

[Bandit]

You have to change your way of thinking from the "I want that" to "I only need and can afford this"......

If I see something "I want" - I wait 24 hours and see if "I still want" or not...... usually I don't.

This sums it up for me.

[SinkingFast]

I don't understand this at all. Speaking from the perspective of just having filed Ch. 7.......ALL of my credit card/loan monthly payts are now wiped out. That IS additional, disposable income!


I don't get it.

Comments?

Not in our case. The CC's that were wiped out was money each month we did not have. We don't have any disposable income recouped from those bills.

We were charging regular living expenses. Robbing Peter to pay Paul. Not knowing how much it truly costs us to live.

I'd venture to guess, many of us were/are that way.

The $1K, $2K, $3K/month CC's minimums we were paying was money coming from Savings or Severance, or selling things. Once the money is gone, that's when the payments stop.

We don't have a spare $1K, $2K, $3K sitting around each month now that we've filed BK.

[chpxiii]

For those of you who are assuming that people post bankruptcy are not "lowering their standards" or not changing their lifestyle, I ask you, did you read the study? I admit I am not finished. I am at part D which talks about income triggers, age being a factor.

To summarize:
Of those people who have filed bankruptcy, a 1/3rd of them found their financial situation to be the same (meaning, it's as bad as it was pre-bkcy) or *worse.* The study concentrated on those who were either the same or worse after bankruptcy, not better off.

And if you had actually read the study, you would find that it is due to a lack of an increase in income. As we all know, many file bankruptcy due to job loss, inability to find work (which means no income) and medical bills. We all know that.

But what the study also indicates is that just becaue we have filed bankruptcy and have a reprieve from creditors, success after bankruptcy hinders on 2 major factors: 1) the ability to increase income (i.e. even *acquire* income or get a better paying job), and 2) whether medical expeditures either decline or a bkcy filer no longer has a need for them.

The study showed that for those who's financial health stayed the same or were worse after bankruptcy, their median income was at (approximately - they give the exact number) $21k/yr. If you take a look at this website:

http://aspe.hhs.gov/poverty/05poverty.shtml

$21k/yr is just barely above the poverty level for a family of four. "Families" were considered in this study and since they don't define a "family" I will assume it is a married couple with children. (Because a "family" can simply be just a married couple without children.)

At anyrate, while I had the assumption that people simply didn't "lower their standards" or change their lifestyle like so many of us (who *are* in bankruptcy or have declared ourselves, let's not forget that) and that was the reason why people post bankruptcy did not receive the "fresh start" they were hoping for, after having read about 50% of this study (I will finish it later) a feel like I stand corrected.

Again, we are talking about averages and mediums. Not the extremes. The study did not concentrate on those people who refused to make lifestyle changes.

I ask you, how in the WORLD can anyone expect someone to lower their standard with an annual income of $21,000 per year? Here in the Dallas metroplex area you literally put your life on the line just to be able to afford a roof over your head with that salary. (i.e. A person making $21,000 per year has to live in a very crappy part of town - I state the obvious.) Bankruptcy does not guarantee a better job, no lay offs, or a raise.

Further, if a person has medical bills that were discharged, but the medical *condition* was not cured due to the bankruptcy, they will continue to accrue medical bills AFTER bankruptcy, keeping them in the same or worse financial condition - especially of the medical condition persists or worsens. This could render an invidual incapable of working, DECREASING their income, which is then counter productive to what this study states: increasing income better your chances of financial recovery after bankruptcy.

Like I said, after having read just about 1/2 of that study, I already feel like I stand corrected regarding my (wrong) assumptions of those who do not find financial relief after declaring bankruptcy.

After having said this, and after having read what I have read (I can't wait to finish it, but I do need to work...) please have a bit more compassion for those whom bankruptcy brought them temporary reprieve but they are still struggling. A person cannot "not" get sick, or force reversal of multiple-sclerosis (that was an example in the study and it hits close to home because my boyfriend was recently diagnosed with MS), and they can also not just force someone to hire them if they simply cannot do the job. (Although I admit that this does mean that, if capable, the person may need to seek some form of training to change careers to one better suited to their physical and mental capabilities.)

At anyrate, a bit more compassion people. I am fortunate, I could make very disparaging remarks against some folks because I make a lot of money - enough that I'll be able to buy out my chpt. 13 in about a month and a half, but I don't because really, I'm here too. And remember too that when we decided to file we didn't want judgements against us, especially when we were continuously beating oursevles up at being "failures."

Peace, peeps!

[Cassiopeia]

Not in our case. The CC's that were wiped out was money each month we did not have. We don't have any disposable income recouped from those bills.

We were charging regular living expenses. Robbing Peter to pay Paul. Not knowing how much it truly costs us to live.

I'd venture to guess, many of us were/are that way.

The $1K, $2K, $3K/month CC's minimums we were paying was money coming from Savings or Severance, or selling things. Once the money is gone, that's when the payments stop.

We don't have a spare $1K, $2K, $3K sitting around each month now that we've filed BK.

Well said. I had not thought of it that way. In my case, SOME of my cc bills were being paid, SOMEtimes.

But I do feel (well, I know) that I have quite a bit more now after filing, than I did before filing (income to use).

However, as others have said above, living within one's means IS the key, and knowing the warning signs so as NEVER to get in such a bad situation again. I think I'd shoot myself to have to go through my pre-BK misery again! I'd say a good full two years of my life was just horrendous due to financial problems. I feel a huge burden has been lifted.

[cathywhite4495]

While there are many cases of unavoidable income loss, I think there is also a culture of buy, buy, buy in America. Depending on where you live, you will be judged by what you drive and where you live. I totally identify with BKTango's view of living. I made a difficult choice to stay in a more rural area because of the lower cost of living. I miss the city but it's much cheaper to visit now and then instead of living there. I also bought a cheaper fixer-upper that I can turn into a real home instead of something fancier that would leave me strapped all the time. Same lower standards on the car and clothes. My biggest mistake all those years ago was not having a savings account. I also had a divorce and couldn't find a decent-paying job for a couple of years so I probably would have ended up in bankruptcy anyway. But maybe not. I'm still not that far above the poverty line as I'm a single mom with 3 kids but in some ways we're richer than people making 4 times my salary. We have family game nights and Netflix instead of going out and spending oodles of money. Camping and car trips. I worry more about making memories than having my kids wear name brand clothes.
Of course, I am able to work and I don't even want to think if somebody had a major illness and needed care or if I couldn't work.
Everybody has some good points and good food for thought!

[SinkingFast]

I think there is also a culture of buy, buy, buy in America.

Before, we were bad to make "impulse buys".

See something you want. "Oh! It's only $3." Throw it in the cart. No more of that.

Now,......... the girls and I will look at something. Say, a jar of Nutella, or a fancy bag of cookies, or something like that. We'll fondle it. And lust over it. And think about for a minute or 2. Then, we'll put it back on the shelf at the store.

Bigger purchases now require shopping around and price comparisons. Then, if we come to a decision about which item to purchase,............ There's a 24 Hour Rule. We must go home and mull it over first. If we still want/need it after thinking it over for a day or 2, then we can go buy it.

We've changed a lot of our buying habits around.

[BKTango]

Before, we were bad to make "impulse buys".

See something you want. "Oh! It's only $3." Throw it in the cart. No more of that.

Now,......... the girls and I will look at something. Say, a jar of Nutella, or a fancy bag of cookies, or something like that. We'll fondle it. And lust over it. And think about for a minute or 2. Then, we'll put it back on the shelf at the store.

Bigger purchases now require shopping around and price comparisons. Then, if we come to a decision about which item to purchase,............ There's a 24 Hour Rule. We must go home and mull it over first. If we still want/need it after thinking it over for a day or 2, then we can go buy it.

We've changed a lot of our buying habits around.

I strangely pictured someone standing on the aisle in the store holding a jar of Nutella, turning it over and over in their hand, licking their lips and then putting the jar back. That stuff is delicious and worth fondling and lusting over. It is a rare treat in my home.

We have also evoked the 24 hr rule in our home. That is a huge thing for us to do, that and price comparison. I am not afraid to go into a store go straight to the item I am looking for and immediately say "I can get that a few dollars cheaper down the road." and leave.