There aren’t many words in the English language less understood and more avoided than bankruptcy.
“There definitely is a stigma attached to it,” Jeff Badgley said. “When people hear it, they get really uncomfortable.”
Badgley sees the discomfort a lot. He is a bankruptcy lawyer who has to convince clients that going through the legal process to get a fresh start financially is not a blemish on their reputation.
“People come in here wondering if they’re doing something wrong,” Badgley said. “They ask if this is reflection on their character and will they feel badly about being irresponsible with their finances.
“My answer is that bankruptcy laws were set up to give people a chance to start over. They’re here to benefit you, not punish you.”
The benefit vs. punishment contradiction is one of many myths and misunderstandings about bankruptcy. Badgley says that in most cases, the truth about bankruptcy is almost the exact opposite of the popular belief.
Reckless Spending Not Primary Reason
For example, one popular myth is that anyone who files for bankruptcy is reckless with money and spends themselves into debt. That might true in a few cases, but national surveys point to three distinct causes that hardly represent frivolous spending:
- Medical debt from a catastrophic illness. A Harvard study said that 62 percent of people filing for bankruptcy cited this as the cause. Families can be getting along just fine when cancer or some rare disease hits a family member or a car accident or an emergency operation suddenly creates substantial medical debt they could never anticipate. “And a majority of the people in this situation have insurance,” Badgely said. “The problem is, their deductible is so high or the coverage they chose doesn’t include the condition they’re in and all the sudden, they’ve got a stack of medical bills they can’t pay.”
- Job loss. In today’s economy, or any economy truthfully, job loss happens without warning. Some people will need re-training to get another job or have to relocate, either of which can exhaust emergency funds, if there are any. They also could have recently purchased a home, car or have children starting college, and can’t handle payments on those bills until they get another job. Loss of health insurance along with the job, could mean an even deeper hole to fill. Many times, creditors won’t wait.
- Divorce. If there were financial problems before a marriage breaks up, it’s almost certain there will be more after a divorce. It’s difficult for many people to maintain the same lifestyle when they have only half the income that was available while married. “Some of the financial obligations that could be maintained in a marriage – things like mortgage payments, credit card debt, tuition, etc – are difficult to keep up with when you separate,” Badgely said. Additional bills can come from alimony or child care payments and legal fees for court proceedings.
Credit Counseling Mandatory
Bankruptcy filings have declined every year since reaching 1.6 million in 2010, the aftermath of the Great Recession. In 2014, just under one million people filed for bankruptcy protection.
A 2005 change in bankruptcy laws made it mandatory that people attend credit counseling classes before filing for bankruptcy. Debt consolidation and debt management programs are offered as alternatives during those classes, but Badgley said when too much time and debt have accumulated, bankruptcy is the most viable option.
“I’ve had some clients tell me that credit counseling classes were a good thing for them,” Badgley said. “But the majority of people I see have been through a crisis in their life and not only need a chance to start over, they deserve a chance to start over. Bankruptcy can do that.”