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Bankruptcy: More Harm than Good

It’s been an interesting week. Natasha spoke with the credit counseling service, and they discussed what happens if her cash flow situation does not improve. Among the possible solutions mentioned was…bankruptcy. It appears that her debt situation is much more serious than we had anticipated.

Natasha emailed me about the conversation, and seemed to focus on the bankruptcy as a potential answer to her concerns. I have not been able to speak with her in person yet, but emphasized that deciding to file bankruptcy could be a decision they would have to live with for a very long time, and should not be taken lightly.

I am really concerned. I understand why she may have focused on bankruptcy above the other alternatives discussed. The pressure of having high credit card debt and the feeling that you can never pay it off can be depressing. It’s really uncomfortable to worry about remembering to make so many monthly payments, and even horrifying when you know you don’t have the money to make those payments. Sometimes it’s easier to think about making it all “just go away,” and moving on with your life. So, we slip into an “avoidance” mode -- pretend it’s not there and don’t deal with it. But over time, it just gets worse and eventually it feels like being in quicksand. “Just making it go away” can be tempting.

It's a complicated process, though. Bankruptcy is a legal proceeding that discharges you from your debt obligations when your debt is substantially higher than your assets or ability to pay it back. There are two types: Chapter 7 (some of your assets could be sold to pay off your creditors, but after that, the legal obligation to pay the remaining debt is discharged) or Chapter 13 (you have enough income, so you still have to repay all or a portion of your debts, following a monthly payment plan approved by bankruptcy court. If you don't stick to the plan, you could be placed into Chapter 7.).

But it’s far from a free ride. A bankruptcy will remain on your credit report for 10 years, and will make it much harder, if not impossible, to obtain credit in the future. More importantly for Natasha, it will probably make it much more difficult to rent an apartment, buy or rent a car, and even get insurance because she will be considered a very high risk in any transaction that involves credit or paying ongoing obligations. This makes it harder for her to reach her long-term goal of moving her family to a safer neighborhood. It might even keep her from getting a job in certain fields.

My concern is that if we don’t address the underlying financial behavior that got Natasha and Zak to this point, they will almost certainly end up having the same problems in the future. To have any chance of long-term success, we may need to spend hours digging into the circumstances and emotions surrounding their purchasing decisions, understanding what they really need to buy, and looking for and learning better and cheaper ways to buy those things. Thankfully, Family Budget Boot Camp can make resources available to Natasha and Zak that they (and even I) did not know were out there. But I’m very concerned that we might not even get off the runway.

Natasha has really struggled to find time for us to talk. I can sense the pressure she is under in her emails...work, studying for mid-term exams, getting home late, leaving early. It's hard, really hard, and to pile financial concerns on top of all that makes facing it all the more unappealing. I'm sure it sounds familiar with most families out there.

We have been emailing each other, but we are at a very sensitive stage in the process where I think we also need to talk in person. I am hoping we can schedule a brief weekly talk, even if it's just for 10-15 minutes. It will give us more focus on the things that we need to work on.

As I have said from the beginning, it’s going to take time and discipline to do all this, and it’s not glamorous or fun. But I really hope that I can connect with Natasha over the next few days and break down the barriers that might be hindering the process. This might truly be their “once-in-a-lifetime” chance they have been looking for.

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