Not Filing Bankruptcy Will Cost You Over 1 Million Dollars!

[HHM]

4/8/11

Every year you spend struggling with debt is one year closer to having a poverty level existence in your golden years. Time is our one limited asset. We can’t make more of it and once it is passed, it is gone. If for no other reason, if you are in debt, you must seriously consider bankruptcy as an option for getting out of debt, you simply don’t have time. Every month and every year you spend struggling with debt is a month and year lost to save for the future, your kid’s college, invest in your business, or achieve other financial goals.

I know the excuses are running wild in your head right now; I will save later, if I only get that better paying job, once the economy turns around I will make it. Seriously, how many years have you been saying that?

My general rule (the Berkus Bankruptcy Ratio™) for considering bankruptcy is if your total unsecured debt (i.e. credit cards, medical bills, lines of credit, student loans, etc) is more than 40% of your gross annual income, you are most likely already insolvent and bankrupt and filing bankruptcy is the only meaningful way to get out of debt. Most of my clients far exceed that ratio.

For example, let’s take a family of four in Colorado; gross annual income is $80,000 and credit card debt is $70,000. That is a debt to income ratio of 87.5%. Gross monthly income is $6,666.67. The typical minimum payment on that debt would be $1,750 per month. The effective withholding rate (for Fed/State tax, Medicare and Social Security) for this family is 20.47%. So their net take home pay is $5,302 per month.

Right off the bat, after the credit card payments (only paying minimums), the couple is down too $3,552 to cover ALL other expenses. To put that amount in perspective, the IRS Collection Standards allow for $4,850 for living expenses for a family of 4 in Denver County Colorado. Those standards apply to housing, utilities, insurance, transportation, food, clothing, household supplies, personal care, minor medical, and a token amount for misc. expenses. The IRS standards leave out many categories of expenses that a family typically incurs. The IRS Collection Standards are used by the IRS and the Bankruptcy Court to determine if the debtor has any means to pay debt.

So, this family is insolvent and bankrupt at this point. If all they did was make minimum payments, it would take 30 years to pay off that debt. Even if the family could afford to religiously pay $1,750 per month, it would take over 5 years. But let’s be realistic, there is no way this family could make such a payment consistently as they are relying on their credit cards to make up budget short falls because of the high credit card payments.

So, let’s put this problem in perspective. If this couple got out of debt using Chapter 7 bankruptcy and was able to save half of what they were paying to their credit cards, $875 per month (which is a reasonable 13.1% of gross income), for 30 years; they would have….wait for it

$2,069,040 in savings

I kid you not, that is the power of bankruptcy and that is the true cost of debt. Here is the shocker, let’s say that instead of filing chapter 7 bankruptcy, that the couple takes 10 years to get out of debt, and succeed, and then start saving $875 per month, but now only have 20 years, using the same assumptions, the couple will only have…

$712,853 in savings

So, the cost of not getting out of debt quickly is not just the interest paid; The TRUE COST OF DEBT IS THE LOST OPPORTUNITY TO SAVE ALL OR SOME OF THOSE DEBT PAYMENTS. In this case, by not filing bankruptcy and getting out of debt in 4 months…

…this family cost themselves -$1,356,187. It might be more dramatic if I say, $1.3 MILLION DOLLARS. Do yourself a favor, get off the fence, get out of debt, and seriously consider bankruptcy as your best, most cost effective option; you cannot afford not too.

http://www.**********.com/blog/2011/...ng-bankruptcy/

[justbroke]

Very nice.

[Flamingo]

This info is great if someone files and can actually change their ways and save and be prudent with credit for the rest of their lives - we all know the percentage of folks who file is high who rack up large amounts of debt again after filing and wonder what happened and don't learn how to budget or save...not too many people will save half of what they were paying on credit cards every month for the next 30 years (as indicated in the article after someone files Chapter 7), but the article and info is an eye opener for people who are deep in debt and the damage that has been done.

[wipetheslate]

The numbers don't lie. In hindsight, I would do a lot of things differently. If I'd declared bankruptcy years ago, I'd have already paid off my student loans with a fraction of the money I was spending using cc's to keep afloat.

[tobee43]

this is an excellent example that should be followed by anyone that is hesitating with the decision or whether to file, or and; the question on the long and short of it all.

using this theory, i'm ashamed at what we lost in "savings" for our future. and, now, we will never live long enough to make up those "lost" savings, at least for us. but, not for many! this should help motivate them into seeing what direction would best meet their future needs.

great article!

[Flamingo]

Also, if one was able to save as is indicated in the article for either the 20 or 30 year period to reach the numbers indicated, they had better be good investors to get a return rate to reach that number and also save consistently each month for that period of time. The numbers indicated as to what can be saved over a 20 or 30 year period are misleading to the average person who does not save or invest heavily and doesn't indicate anything about having to invest the money properly to reach that goal. The amounts listed are wisely invested amounts at the end of a 20 or 30 year period if at all possible with market fluctuations. The artiicle doesn't indicate that....

[HHM]

Correct Flamingo, it does appear the savings numbers require consistent investing. But investing is different than trading. The numbers are not that far off from how Dave Ramsey approaches issue...find a few mutual funds or ETF's with high long term ROI, and dollar cost average (that is, invest the same amount each month regardless of what the market is doing). Generally, the type of investment would be 1 Large Cap, 1 Mid Cap, 1 Small Cap and 1 International Growth fund. with either a 30-25-25-20 or a bit less aggressive 40-25-25-10 distribution.

But you are correct, just sticking your money in a savings accounts or CD at 0.5 - 1.0% interest rate isn't going to achieve those numbers. But at the same time, let's say the article is half wrong, it is still a $644,000 difference, that is a huge amount to lose for being in debt. Nothing to sneeze at.

[tobee43]

all i know is my mattress is paying 2.5% LOL!! and helping us sleep better.

there is absolutely nothing we feel "safe" in...not even corp. bonds...after all they used to sell at par, pay a decent rate of interest, and your initial investment ( and or principal) is totally returned to you when the bond is called in. when you are this point in life as we are, we can't afford to take any chances with what we can or are willing to invest it. so for right now...we are in "hold" position until the fog lifts.

[discouraged]

And, what happened with me - laid off, 401k was losing value at $1,000 per month and no end in sight. At age 55 (2 years ago) I decided to take it out rather than keep losing it, not realizing what I WAS losing, having no advice as to what to do with it, I ended up spending it on living expenses because by taking it out, it stalled unemployment.

Wish I'd known better but didn't.

It also may be unrealistic to be able to save as much as you should. Look at gas & grocery prices - they have risen drastically in just a few short years. How much inflation is factored in? And, in this economy there is no job security so folks really can't go by what 'used to be'; that if you worked hard you got raises and your job was secure. Many, many people are now living with half the income they used to have.

I will say though, the article is an eye opener. How many of us think - 'if only'. I wish I would have filed at least a year before I did rather than holding on to the thinking that I was somehow supposed to be a responsible adult and pay my bills. Hopefully this will help people think of their future and realize the only ones getting ahead on the deal is the banks.

[tobee43]

And, what happened with me - laid off, 401k was losing value at $1,000 per month and no end in sight. At age 55 (2 years ago) I decided to take it out rather than keep losing it, not realizing what I WAS losing, having no advice as to what to do with it, I ended up spending it on living expenses because by taking it out, it stalled unemployment.

Wish I'd known better but didn't.

It also may be unrealistic to be able to save as much as you should. Look at gas & grocery prices - they have risen drastically in just a few short years. How much inflation is factored in? And, in this economy there is no job security so folks really can't go by what 'used to be'; that if you worked hard you got raises and your job was secure. Many, many people are now living with half the income they used to have.

I will say though, the article is an eye opener. How many of us think - 'if only'. I wish I would have filed at least a year before I did rather than holding on to the thinking that I was somehow supposed to be a responsible adult and pay my bills. Hopefully this will help people think of their future and realize the only ones getting ahead on the deal is the banks.

to quote a most respectable "mod" ....

"hindsight is blind".

i also wished i had known.

[stanpendula]

I waited 3 years before filing. 3 YEARS !! I don't know what I hoped for. In the meantime no college savings and my son starts this Fall. To put is mildly, him getting loans for $22,000 a year it's going to be a challenge.

[strummerfan]

The only thing I fault myself for is procrastinating to the point that I had nothing left and no way out, from personal polls of people that have BK'd or that are going to in general they do it about 2-3 years too late. Sometimes its hard to see the truth, I want to send that ruthless un-law abiding debt collector a thank you note since it was her that finally pushed me over the edge to do my BK. In the end I got a clean slate and they got NADA!!

[StartinOver]

Wow. I always suspected I'd end up "working until I'm dead," but now I really understand why. I have a dirty little secret.... this is not the first time I've been in debt wI've been in debt to the insolvent level mentioned in this article -- 2 times before. And I was so proud of solving it myself through brute strength budget cutting in my 30's and then again in my 40's.

It was for different reasons, and with different spouses, but the long and short of it was, I worked my way out of it my self the first 2 times. This time the avalanche really came down on us and it's not possible to use bull-headedness, or even extreme sacrifice to salvage it. And at 53 years of age with only 160K in retirement assets, I'm out of time. I will work until I'm dead - this has a lot to do with my recent decision to change careers to something that has deep meaning for me and which I'm likely to be able to continue doing for a long time because I love it. But it meant starting over at the bottom of the ladder and taking a salary level I haven't seen since I was in my late twenties. Which sets me further back in terms of starting to put away savings after the discharge.

I am leaning on my faith to carry me through this experience, so it will all be all right.

[IHateToBeEmo]

I never would have dug out of my debt hole if I hadn't filed bankruptcy. I was making a credit card payment and then immediately charging groceries/gas in order to make it another week. That was never going to change. It's nice to be able to save again and to spend less than we make.