The Myth Behind Bankruptcy as a Fresh Start to Life
The Myth Behind Bankruptcy as a Fresh Start to Life
Please don’t get fool by all the bankruptcy advertisement around us, with catchy taglines like, “Make a Fresh Start after Bankruptcy”, or “Under water? Bankruptcy provides you with a Fresh Start”. Don’t be suckered by personal bankruptcy lawyers or debt modification companies fixated on making you another profit center. Bankruptcy is not a Fresh Start; it was never intended to be an easy path out of your financial commitment. The chapters in the book of bankruptcy were designed to be a difficult to endure, to be used as your last resort after you have tried every other legal recourse and have no other alternative.
Start Afresh
The mythical “Fresh Start” proclamation dates back to the Supreme Court trial, Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934), which declared:
“One of the primary purposes of the Bankruptcy Act is to ‘relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes…This purpose of the act has been again and again emphasized by the courts as being of public as well as private interest, in that it gives to the honest but unfortunate debtor… a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.”
Seriously, even the Office of the US Courts consider bankruptcy a fresh start? What am I missing?
For the ensuing four decades the Bankruptcy Act was simple and clear. So yes, it truly provided individuals the fresh start and new opportunity in life proclaimed. An honest debtor could gain relief from the weight of oppressive indebtedness. It was an instrument for new prosperity and financial re-awakening.
Unfortunately, our political system has a reputation of messing things up. Over time, modifications to the laws transformed these moral and reasonable policies into fire breathing dragon. As time passed, politicians figured out various ways to tamper with the enacted laws, mostly in favor of industry lobbyist. Major changes occur in the financial fear stricken years of the 1970s. Some changes make sense, like the exclusion of child support and alimony from bankruptcy discharge (Support your kids no matter what).
The other major change of the decade made a lot less sense (no sense at all) and has become a poison pill for millions of Americans. Before 1976, federal student loans were included bankruptcy discharge proceedings. Congress, in an effort to “safeguard national investments” passed new legislation that made FEDERAL student loans not dischargeable during bankruptcy proceedings. This change was due to a short-lived panic in the country about general financial default rates as documented in a 2013 report, “No Way Out: Student Loans, Financial Distress, and the Need for Policy Reform”, the National Consumer Law Center reaffirms the following:
“In many ways, the action taken in the 1970’s was an overreaction based on fears that negative reports about defaulters might undermine the fledgling student loan programs. Some even noted that it was inappropriate to debate this issue in the Education committees and as part of the education authorization process. Yet, the exception remains and was even expanded, inexplicably, to private student loans in 2005.”
The expansion of the bankruptcy laws continued with modifications in 1990 and 1997, but it wasn’t until 2005 that the legislation really turns torturous. The Bankruptcy Protection Act of 2005 empowered, not-so-righteous, politicians to protect industry interest with the inclusion of PRIVATE student loans under the same ruling that excluded federal student loans from bankruptcy proceedings. This single Act made it exceedingly harder for fellow Americans to file for bankruptcy, resulting in major increases to the average utilization rate of credit cards for debt payments.
Today, there are over 44 million student loan borrowers owing over $1.45 trillion in student loan debt with an 11% delinquency rate, not a dollar of which could be reasonably discharge under bankruptcy.
Remind again why the original law was enacted again? “One of the primary purposes of the Bankruptcy Act is to ‘relieve the honest debtor from the weight of oppressive indebtedness…” so much for that!
A Reset not a Fresh Start
Bankruptcy does provide you with a minor “reset” or “second chance” to some degree, but it comes with lots of baggage that will stay with you, financially and emotionally, for a long, long time. Depending on the bankruptcy chapter filed (Chapters 7, 9, 11, 12, 13, 15), it can help us eliminate or restructure our books to be able to reestablish our financial identity. The two most common bankruptcy filings are Chapter 7 and Chapter 13.
Chapter 7 bankruptcy is a straight up Liquidation Program, it’s the most common representing 70-percent of non-business bankruptcy filings. As a liquidation process, all your assets are taken, sold and turned to cash. The funds generated from the sales of your assets, are used to payout your creditors. The debtor receives a discharge releasing him or her from personal liability for certain dischargeable debts. You may be able to keep key assets, but it varies state to state. You walk away from the mess with almost nothing, but it can quickly (within months) clear you of ongoing litigation of dischargeable debt.
Chapter 13 is a Restructuring Program that provides more flexibility than Chapter 7, but it takes A LOT longer to exit the process (3-5 years). Chapter 13 makes up almost 30 percent of all bankruptcy filings and involves repaying some of your debt and having the rest forgiven. You can only file Chapter 13 if your debt meets/exceeds certain criteria. This is a good option for people who do not want to give up their property (home sweet home) or don’t qualify for Chapter 7 filing due to their high income.
As noted, bankruptcy does not erase all financial responsibilities. Here is a summary list of non-bankruptcy types of debts and obligations:
- Federal student loans
- Alimony and child support
- Debts that arise after bankruptcy is filed
- Some debts incurred in the six months prior to filing bankruptcy
- Taxes
- Loans obtained fraudulently
- Debts from personal injury while driving intoxicated
From Here On
Personal Bankruptcy can be better described as a new opportunity to make good for your financial future, just as the General Educational Development test (GED) can be define as a second change to get a high school diploma after failing out of school. You know you made mistakes in your life, have confessed to your failures, and through these actions (Bankruptcy or GED), hope to make amends to improve your future outcomes. Both provide another chance, but the stigma that comes with the disclosure of failure, akin to a financial scarlet letter, remains with you for life.
After completion, you are congratulated (by the few that know your struggles), and feel stronger for getting through the process. Awesome, but deep inside you know that you will never be the same, or perceived by other in the same light as before bankruptcy. Don’t get me wrong, I have a lot of respect for others, like me, that are able to survive life’s trials and tribulations and remain determine to improve their situation for a better tomorrow. The tides have turned, sleep does come easier and our future appears bringer. Success is manageable from here on out, if you remain committed to mental, financial and emotional growth. Just remember to breath in that “fresh” air, and push forward one day at a time.
