There's no shame in BK

[freefall]

About six months ago we emerged from Chapter 7 Bankruptcy. Prior to that, I was an avid reader of this forum, and still am, but I have never really thought I had anything to contribute. Now, with some hindsight, I think I might.

There is no shame in bankruptcy. You might as well get that out of your head if it's part of your consideration to file or not to file. If you can file--you should. Even if you're basically doing okay. If you can file a Chapter 7, especially a no asset Chapter 7, and that will relieve you of significant debt--you should do it. Because the truth is, most people cannot. They either make too much money, or they would lose too many assets, or they have school loans and such that can't be erased in bankruptcy.

The truth is, there's no shame in bankruptcy. Not today. If you can file a no asset Chapter 7, you're lucky. We were very lucky that a long time before I lost my job, we transferred all our debts to credit cards with the intent of paying them off one by one. It didn't happen that way because I lost my job, but when it came time to file bankruptcy, we were very lucky--everything was on credit cards and consumer loans. That means every debt disappeard on the day we were discharged (over 80 grand).

I have a new job now (a good one, and I thank God everyday for it). We have credit cards again (but we will never be in debt with them again. We buy on them, then we pay them off twice a month just to build a positive credit history).

The only shame I have, if you can call it that, is that I can't tell people the good news. I feel bad because in my profession, most people didn't pay for college with credit cards the way I did. Most of them have huge student loans that BK won't help. Most have too many assets, or can't be unemployed for any length of time and survive, so they make too much money trying to make ends meet to ever file for Chapter 7.

Therefore, I don't bring it up to them. I know some people who are so broke they are hounded daily by collectors, but they could never scrape together the 1600 to file through a lawyer. The shame--the only shame is that they can't file.

If you can file a Chapter 7, especially a no asset Chapter 7, if you can make that happen, you are blessed. Companies and Countries are doing it daily. It's not the old ethics anymore. Now there are only those who can and those who can't, and I thank God almost everyday that I was one of those who could.

And as for the morality or ethics of it: who's more important to the economy right now? Someone who is spending all their free cash trying to pay off credit cards or mortgages to a bank who got a bailout, or someone who has no debt and is out there consuming again?

But I do feel shame. I feel it for coming in here and posting this when I know many reading it can't file a no asset Chapter 7. But for the sake of those who can and might be thinking they would but it's "wrong" to do so--you need to think again. In today's world, it's almost the reverse--it's almost an ethical duty to do so.

[Brazzy]

Understandable to a point. I disagree with a few points.. OF course!

I dont think its really fair to mention bail outs. Banks need bail outs because too many people are defaulting on their loans. Now this whole conversation could just run in circles and pointing the blame finger and it ends up being a chick or egg conversation.

Maybe its because I was raised by my grandparents who would kick my ass if I ever mentioned bankruptcy. It was put in place to help the people who are truly in dyer situations and there is no doubt that it has come to a point in time where some (not all, not even a majority, just some) who take advantage of the system. I know I say it a lot, but a lending institution is a business like any other. When people default on their loans you are jacking the bank's bottom line. Like any other for profit business when the bottom line gets jacked cuts have to be made. I see it on here how people cheer the fact that they screw the banks over. The catch to that is that the banks are here to stay. They are not going anywhere. When a burden is placed on them they simply pass the buck on to the next guy in the form of employee layoffs and jacking up fees and interest rates to other customers.

Now personally my household does not take in the income it should and due to student loans and such I am up to my eye balls in debt. I've seen too many good people lose their jobs and the thought that I too could be contributing to the problem scares me. It may be fine for other people, but I would personally be very disappointed in myself.

[Flamingo]

Anyone who files or has filed BK will be paying for their own BK and everyone elses for years to come in increased rates, fees, taxes, costs, etc. All that dumped debt has to get covered somehow so everybody pays. Even those folks out there who never had to file.

[ohiogal]

freefall, I hope you're not advocating declaring BK "even if you're basically doing OK", just to dump debt you no longer feel like paying. It should always be your last resort, after you've sold everything you can, tried to find another job, and tried to work with your creditors.

BK is not without consequences, and as has been pointed out, EVERYBODY pays. There's no shame in BK, but it's not something I'd be bragging about, either. It is NOT "good news" to go bankrupt. The gloating tone of your post is, frankly, a little strange. Maybe I'm reading it wrong.

[Brazzy]

Anyone who files or has filed BK will be paying for their own BK and everyone elses for years to come in increased rates, fees, taxes, costs, etc. All that dumped debt has to get covered somehow so everybody pays. Even those folks out there who never had to file.

Thats hitting it right on the head. Its a key argument for keeping student loans non dischargeable. You start allowing them to be discharged and now they are considered a more risky investment. They will have to cover the loss to BK filings some how and the answer will be to jack interest rates for everyone else. College is tough enough for most kids to get into and get through, never mind having to pay back a student loan with a ridiculous interest rate.

[BobMango]

...
I dont think its really fair to mention bail outs. Banks need bail outs because too many people are defaulting on their loans.

This is not true. Most banks needed the bailouts primarily because of bad bets on Credit Default Swaps (speculating on their part) or because they were not prudent in their lending practices. The problems with sub-prime loans has now spread to first tier credit because of the cascade effect. Most institutions that did not participate in the CDS market and followed good lending practices are perfectly fine.

Banks found themselves in dire straits for the exact same reason that individuals find themselves in trouble; poor planning, imprudent financial practices, etc.

[Brazzy]

Like I said the chicken or the egg. For ever point there is a counter point and a counter point to the counter point.

To which you make a point that can easily be countered by:

Exactly. They did not anticipate this volume of defaults. You can call it poor forecasting on their part, but its still that fact that defaults went much higher than anticipated. Companies that insured or guaranteed loans had to pony up at first, but the defaults were beyond their means and they went belly up. This left banks with a big pile of steaming BS on their door step which they now have to deal with themselves. They wrote the loans thinking if they went bad someone (who they paid) would bail them out. They got the shaft and now have to eat a boat load of loans to which they never thought they would have to deal with. To every point against my statements I could just reference a perfect world in which everyone paid their loans on time and as scheduled. If it were that perfect world there would be no bail outs.

[helpmeout]

Understandable to a point. I disagree with a few points.. OF course!

I dont think its really fair to mention bail outs. Banks need bail outs because too many people are defaulting on their loans.

Would these be the very same banks who got lax on their approval criteria and talked people into ARM's?

I don't feel sorry for the banks at all. The banks got a bail out. And then didn't turn around and help keep homeowners from foreclosing. Rather than do modifications and get the mortgage to an affordable level, they made homeowners jump through hoops and then denied them anyway.

Banks made very bad choices, as well. They don't get let off the hook simply because we need banks. They contributed greatly to the credit mess. In other words, they were (and probably still are) acting very irresponsibly.

[Brazzy]

No, they dont get let off the hook. At the same time neither should anyone else. Lets go back to the perfect world and imagine banks having Miss Cleo like powers and were able to see the future and know right up front who would default on their loan and who wouldnt. They then decided with their clairvoyant vision to deny anyone who they saw would default in the future. People would be up in arms screaming about how they are hindering economic growth and how the banks are all douche bags because so and so got turned down for a home loan. IF lending guidelines were like that where do you think the housing market would be? The Auto industry? There would be nothing left but people renting apartments, walmart, and taco bell (like the movie Demolition Man).


As for the bail out not helping people. Its a bail out. Its not a loan to throw a backyard BBQ and make everyone happy. The damage was already done. It was money to keep vital companies in vital industries from going completely shitting the bed.

Now for the most part I am playing the devil's advocate here. I'm typically the last person to defend banks in a social conversation. However since I'm the only one here willing to do it so I guess I have no choice. It sounds like the banks are to blame and everyone else is just a victim. Thats not the case. There is plenty of blame to go around to everyone. There are some very valid points here, but the same points can be made to any individual who defaulted on a loan. You can ask the banks AND individuals who took out a loan they couldnt afford and defaulted on the loan the same exact questions. No they didnt plan for it properly, no their decision making making was not very good, and yes they did make a mistake. In my book NO ONE goes unblamed. Banks saw a pile of cash they couldnt keep while people saw shiny new cars they couldnt afford. Because of this fiasco I am sure that every bank, business, and individual suffering right now can look back on decisions they have made in the past and realize they made some pretty poor decisions.

[helpmeout]

No, they dont get let off the hook. At the same time neither should anyone else.

You know what, consumers are to blame as well. But the banks do shoulder most of the blame. They were in a position to put a stop to it but got greedy instead. Predatory lending (of which I am not a victim of, I am here because of bad choices I made during a divorce) is very real.

I am of the opinion that there should be a finance class taught to children, starting in middle school. If they were to do that, there would probably be a drop in predatory lendors as people will actually understand what predatory lending is and how to avoid it.

[BobMango]

No, they dont get let off the hook. At the same time neither should anyone else. Lets go back to the perfect world and imagine banks having Miss Cleo like powers and were able to see the future and know right up front who would default on their loan and who wouldnt. They then decided with their clairvoyant vision to deny anyone who they saw would default in the future. People would be up in arms screaming about how they are hindering economic growth and how the banks are all douche bags because so and so got turned down for a home loan. IF lending guidelines were like that where do you think the housing market would be? The Auto industry? There would be nothing left but people renting apartments, walmart, and taco bell (like the movie Demolition Man).


As for the bail out not helping people. Its a bail out. Its not a loan to throw a backyard BBQ and make everyone happy. The damage was already done. It was money to keep vital companies in vital industries from going completely shitting the bed.

Now for the most part I am playing the devil's advocate here. I'm typically the last person to defend banks in a social conversation. However since I'm the only one here willing to do it so I guess I have no choice. It sounds like the banks are to blame and everyone else is just a victim. Thats not the case. There is plenty of blame to go around to everyone. There are some very valid points here, but the same points can be made to any individual who defaulted on a loan. You can ask the banks AND individuals who took out a loan they couldnt afford and defaulted on the loan the same exact questions. No they didnt plan for it properly, no their decision making making was not very good, and yes they did make a mistake. In my book NO ONE goes unblamed. Banks saw a pile of cash they couldnt keep while people saw shiny new cars they couldnt afford. Because of this fiasco I am sure that every bank, business, and individual suffering right now can look back on decisions they have made in the past and realize they made some pretty poor decisions.

The thing is Brazzy, your point was that the banks were in trouble because they made bad loans in their consumer mortgage departments. That was not the reason most banks were in trouble. Most of them had major problems in their commercial portfolios and their treasury programs, i.e. investing in CDSs. It was this wild speculation that left them exposed. AIG's problem was entirely due to CDSs and this created the stampede effect that the gov't felt they needed to forestall.

Helpmeout's point is right on. Banks have no incentive to help homeowners keep a house, they will be compensated by mortgage insurance or the next bail out. So it's in their best interest to string mortgagees along for as long as possible, then pull out the rug and cash in on the mortgage insurance, etc.

If the gov't really wanted to fix the problem, for the same amount of money they've wasted on this crisis they could have reduced every home mortgage by 40-50%. (and I am not advocating this, just a thought exercise) Think about what that impact would have been. People could have refinanced or sold homes that are underwater now. Foreclosure would have been drastically reduced, etc. Monthly payments on adjustable mortgages cut in half, etc.

I believe in the free market and I understand that it will involve painful evolution from time to time. Buggy whip makers public stables certainly felt the pain as the automobile came on the scene. If a company can not manage itself then it should go through bankruptcy, sell assets or shut its doors. Yes it will be painful but gov't has no business bailing out banks and automakers (or homeowner for that matter). We have simply kicked the can down the road and I am afraid that the ultimate reckoning will be worse than dealing with the problem correctly would be now.

[Brazzy]

AIG's crisis came about when it was downgraded. It was said to have limited ability to raise cash. Downgraded... Liquidity issue. Why was it downgraded? Well look at its investments.

I made the statement and referenced the chicken and the egg intending for it to be rhetorical.

On to predatory lending. It does exist, but did all banks who are suffering right now take part in predatory lending? That term has been used awful loosely over the past few years and its kind of taken on a new meaning. However it was originally based on the idea that people didnt know what they were doing. A vast majority of the time people knew exactly what they were doing. No one made people take cash out refi's buy cars they couldnt afford or rack up credit card debt. Poor lending guidelines and poor spending habits are not the same as what predatory lending originally intended to describe. Nowadays any bank that wrote a bad loan is considered a predator. Yeah they gave the credit card, but when they issued the card it did have a zero balance on it.

As for the loan mods thats a bit off course too. There is a whole "qualification" process because even under loan mod terms people still cant afford the house. Its only delaying the inevitable. As for the mortgage insurance point. Who is paying these claims? How many of these companies are still active and will pay out the claims? These companies are tapped too and a lot of them filed BK, closed its doors. The bank doesnt want your house, but it doesnt want to write a new loan for you if your not gonna pay it either. Only one thing is for certain. Its gonna be a tough road to recovery. Once the market starts to rebound they will start looking at the charged off Jr liens again and probably start moving on them as well. That will put a hurtin on the housing market too.

[brendamc67]

When it comes to blame, maybe there is enough to go around for everyone? When I think about our cc debt (roughly $80,000), I think to myself ... how did I do that? Then I think, why did those cc companies let me? That's more than what we make in a year.
In the end, all I can do is say ... our bankruptcy is something I will live with the rest of my life. The shame (yes, there will be shame because it is programmed into all of us), will linger to my death bed. Now ... what do I do with that shame? Do I let it ruin my life, or do I take it and make it into something positive.
My positive will be living a "pay as you go" life. Never, ever letting myself get this far in debt again. Giving back to the world (something we haven't been able to do for a long time, but something I enjoy now) in the form of charitable contributions and time. The time that I spent worrying over our debts will soon be free for the taking.

Anyway ... that's my opinion. Thanks for letting me offer my 2 cents.

[freefall]

Well, think about it this way: every TV commercial you see is basically a lie. BP drilled for oil without a clue or care about whether or not the blow out preventer would work. Banks have no problem allowing you 80K in credit card debt and using you as a working payback slave for the rest of your life. You are taxed to pay for a war in Iraq that was admittedly founded on nothing (they had nothing to do with 9/11). And even more generally, you live in a society where your only worth is what you spend in its economy.

They even got you to believe you're a bad person if you file bankruptcy. That businesses do it all the time, that really rich people do it all the time, that doesn't matter. They need you to believe you are bad if you do.

So, incrementally, they make it more difficult as you start to wake up to the fact that BK is legal and if you reach a certain point in your budget mathematically, you're a fool not to do so. It starts with no school loans allowed, then no back taxes, then in 2005 they start a means test, and on and on it goes. Eventually, individuals won't be able to file bankruptcy, not Chapter 7, anyway, and that will just seem good and proper. Oh, it will be easy to borrow again and get a house, etc. The government will back the loans--you watch. And when they do, you won't be able to bankrupt that debt. Welcome to being a debt-serf.

Well, we pulled back the curtain. We exposed Oz. That's all I'm saying.

[Brazzy]

Well, think about it this way: every TV commercial you see is basically a lie. BP drilled for oil without a clue or care about whether or not the blow out preventer would work.

Thats a good point. When there are large sums of money on the table (to be gained or lost) ethics goes out the window. That goes for any industry.