bankruptcy

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Should you declare bankruptcy?

What are the advantages?
What about the disadvantages?

Surprisingly, most people don't know.

Even those who are drowning in debt.

I haven't really thought about bankruptcy for a while until I walked into the room during this episode of Last Week Tonight a few months back. For those of you are unfamiliar with the show I guess I might describe it as left-wing propaganda laced with comedy on HBO. However, while some of the conclusions drawn might not be so great, the problems are usually posed pretty accurately, so I've found useful information can indeed be derived from the show when viewed under the lens of a skeptic.

https://www.moneyunder30.com/when-you-need-to-file-bankruptcy

After watching I decided to brush up on some of the facts with this supplemental information. Here are some rules I've derived for bankruptcy that everyone should know (if only to inform others who may need some good not not financial advice.

Rule #1: Bankruptcy is ironically expensive.

Yup! Lawyers are expensive. Shocker I know.

Apparently some law passed in 2005 made it way more expensive to declare bankruptcy. The paperwork/regulations essentially doubled. You can always try to file all the paperwork yourself (only 90 pages long) but if you mess up the consequences are not so fun. Essentially doing it yourself and avoiding the litigation costs is not really worth it or even a viable option in the vast majority of cases. It costs thousands of dollars to declare bankruptcy.

Rule #2: There are two kinds of bankruptcy.

  1. Chapter 7
    This is what we typically think of when we think "bankruptcy". Debts are essentially forgiven and our credit scores take a big hit for a certain period of time. Ironically credit card companies will offer people who have just declared bankruptcy with a line of credit because they know the person no longer owes anyone any money, and they can get away with offering abysmal APR rates, knowing full well it's a risky play, but worth it on the average.
  2. Chapter 13
    This is more of a restructuring of debt rather than eliminating it entirely. This allows payments to be modified so that citizens can keep up with things like mortgage and car payments. It costs more but there is no money required upfront (whereas chapter 7 require all fees to be paid immediately). This creates some pretty messed up situations because sometimes lawyers will push chapter 13 on individuals using the marketing tactic that it has no down payment, even if chapter 13 doesn't make sense for their particular situation.

Chapter 7 bankruptcy

Otherwise known as “liquidation bankruptcy,” Chapter 7 is designed for individuals with no way to pay their bills otherwise. This type of bankruptcy pays off as much of your unsecured debt as possible, including credit card debt and medical bills. The court “liquidates” your assets by converting them into cash to pay off your creditors.

Chapter 13 bankruptcy

Also known as “reorganization bankruptcy” or “wage earner’s bankruptcy,” Chapter 13 is designed for people who have a consistent income and who want to keep their property. Chapter 13 bankruptcy gives filers a “grace period” of between three to five years to make payments on their debts. Any debts that remain at the end of the grace period are discharged.

Fun story:

If you miss a single payment during Chapter 13 timelines (3-5 years) you're totally fucked and have to start back over at square one. You're creditors also have the option to liquidate your assets at this point.

Rule #3: Student loans can't be forgiven.

Yep, just when you thought you were going to escape student debt, turns out bankruptcy won't get you out of most contracts signed with the government. I could probably write an entire post on this topic alone but, I'll leave that for never. Have fun being poor.

Here are the debts bankruptcy will NOT erase:
  • Student loans, whether public or private. You can get relief from student loan payments, but that’s a separate process
  • Income taxes you owe. There are payment options for back taxes. Just like student loans, though, income tax payments have a process all their own
  • Child support and alimony
  • Court fines or other legal penalties (such as traffic tickets)
  • Debts to government agencies
  • Debts for personal injury or death caused by drunk driving
  • Any debts you forget to list in bankruptcy papers

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Rule #4: Taking courses on fiscal responsibility.

In many cases people trying to declare bankruptcy are required by law to take a bullshit class about being more fiscally responsible. On the Last Week Tonight episode, a lady was interviewed who was rightfully highly offended by the entire process.

This particular woman was bankrupted by hospital bills due to her child having cancer or something along those lines, and she was forced to sit through a ridiculous government run seminar about how to not spend money on expensive clothes and stuff like that. She was basically vibing like, "Sorry, I guess next time I should try to avoid having my child die slowly and painfully. My bad."

It's been shown that the required seminar is about 0% effective even when it applies to the people it targets. And yet it hasn't been removed. It's basically just a punishment for those who are already down on their luck. Yet another poor person tax (psychologically/time wise).

Rule #5: Don't declare bankruptcy.

So after all this "extensive research" on bankruptcy: I've come to the obvious conclusion. Don't do it! Declaring bankruptcy isn't worth it the vast majority of the time. There are lots of other ways to restructure debt or come to arrangements with creditors that cost very little or nothing at all.

Bankruptcy is a legal procedure, so it should only be employed in the event that we need to perform legalese gymnastics. I've come to the conclusion that if you aren't being sued by your creditors you probably don't need to declare bankruptcy. If you are being sued and declaring bankruptcy is cheaper than going to court (likely) and losing (even more likely), you should probably declare it to sidestep the lawsuit.

Another example would be someone who doesn't want their assets (house/car) to be repossessed and liquidated. By declaring Chapter 13 users can potentially avoid losing their property to the entities they owe money (just don't miss a payment). You can't accomplish this with Chapter 7 because Chapter 7 automatically liquidates all your assets before the remaining debt is forgiven.

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Holy crap... crypto though!

Now that I think about it there will likely be some crazy things that happen with crypto in this regard. Imagine someone loading up on a ton of debt, throwing it all into crypto, and then claiming they lost all the money through gambling or a hack or whatever. When their creditors sue them they declare chapter 7 bankruptcy and the court can't liquidate any of the crypto because they don't even know if it exists or not. That would be pretty insane. I bet this has actually already happened dozens of times and no one has been caught yet (or it was never reported widely). Food for thought.

My experience with crippling debt?

Back in the day I was living off of credit cards and wracked up way more debt than I could pay back. What did I do? I just didn't pay it back. Did I declare bankruptcy? Didn't have to. Once credit card debt gets sold to collections (pennies on the dollar at auction) you can no longer be sued for it.

Now over four years later my credit score is back in the "good" range because all that bad debt has dropped off my record. I certainly wouldn't recommend doing this on purpose but in my case it worked out just fine. I borrowed a lot of money, never paid it back, and everything is already back to normal.

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Again, bankruptcy is often only needed when you're being sued, and this doesn't happen very often because suing someone is expensive (especially if it's only for a couple thousand dollars here and there across multiple sources). More often than not creditors will just cut their losses and sell the debt to collectors. That way they don't have to pump even more money trying to reclaim debt that they might not get back anyway.

Conclusion

It's pretty messed up, because I know multiple people who have declared bankruptcy, and after the research I've done here I'm left wondering if that was even the right move for them. I don't remember them being in any legal trouble or at risk of losing valuable collateral.

Unfortunately, it seems like we can't even necessarily trust bankruptcy lawyers to be straight with us to give us proper advice. After all, their salary depends on people declaring bankruptcy, so there's a major conflict of interest there when it comes to picking the correct option considering the individual's specific situation.

While you personally may never need to think about declaring bankruptcy, surely someone you know will have to. Hopefully armed with this knowledge you can give your friends and family the proper warnings when it comes to this legal procedure.

not not financial advice
fact: i am not a lawyer

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19 comments
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I borrowed a lot of money, never paid it back, and everything is already back to normal.

Good to know. I have a lot of debt, but it is already with collectors. So based on your experience, I probably shouldn't worry about 'fixing' it. In a few years it will just disappear, which I had kind of heard from other places too.

The idea of wracking up some credit card debt to get Hive is something I've considered. I have like three card offers on my desk right now ... it would be fun to put about $1500 into Hive right now. :)

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Something I didn't mention is that if your credit score is important to you it's possible to call up the collection agency and negotiate with them. You can really lowball them when armed with the knowledge that they are a corporation seeking a profit and bought the debt with pennies on the dollar.

Do you want x amount, or do you want $0?

Paying off the debt cheap allows you to rebuild your score much faster.

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Thanks for sharing, I find it interesting and educational.


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You keep leaving comments like this in the volume you have been using and you will soon get a whole bunch of attention you might not want.

We are glad that you are here, but what you are doing is spammy.

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Noted, I'm just doing my best to engage in activities here.
However don't call it spam because I do my best to create post and also participate in context.
Thank you.


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Thanks for sharing this, it's good advise for all. I too had run up a lot of debt in my younger days and decided the best action was to ignore it until it went away, which is generally bad advice for a problem, but like you, it worked out just fine in the end.

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My parent declared bankruptcy back about 20 ish years ago. They have had a hell of a time recovering and really it didn’t help them at all in the long run because they are still 2 of the worst money managers on the planet, lol. But I love em. It’s why I buy BTC and hoard it... Because I know I am not getting shit as an inheritance, lol.

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I think it really depends where you're at in life... my Dad had some issues, got a car repossessed and then could not get a loan for anything for a decade. If you don't need anything, you should be cool to play debt shenanigans, but if you need an influx of cash for something you might struggle.

While you've been learning about bankruptcy, I've been learning how the mega rich play $0 taxes... and that's mainly through having all their income in assets and stocks... and then taking out bank loans when they need spending money. The loans reduce their taxable income and they can use all their assets as collateral... and if you're rich then you get super cheap loans, etc etc. Honestly, in the US, being poor is the most expensive thing of all.

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Ah so you've been reading those articles they've been pumping out eh?

Yeah you don't have to pay income tax if you don't have an income,
or if you offset the income with losses or charity write-offs.

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Of course... how am I supposed to participate in a social revolution if I don't crystalize my intent to eat the rich?

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Hah, never really given this any thought... I wonder if things are too different here in my country. From the little I know, I'd say it's not too different, but I wouldn't know for sure.

That debt-into-crypto play is something interesting to think about! I don't think I have the guts to make that move, but would be interesting to hear the experience of someone who attempted that!

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Wow!
This was an eye opener!
I always thought of bankruptcy as an inexpensive process, after all you are declaring bankruptcy because you are short on funds. But that would make to much sense, and when did lithe government ever pass laws that made sense. LOL
You didn’t give the video the best introduction and I find that guy a strange combination of interesting, and annoying, so maybe I will take a crack at it now that I finished your article.

Thanks

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I am not so sure whether or not someone liquidated their assets into crypto then declare bankruptcy. It seems like something that tax evaders would probably do but who knows.

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Interesting read, even if I don't live in the States. I saw quite often Chapter 11 related to bankruptcy, but I suppose that's for companies, not for individuals.

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Jajaja creo que seria imposible que alguien se declare en bancarrota por activos en criptomonedas, no seria valido legalmente porque las criptos no son monedas oficiales en los paises, en ese caso si la persona se declara en bancarrota alegando ese punto ¿el procedimiento legal no podría proceder? debe existir algo justificable para uno declararse en bancarrota, un balance que justifique que tus ventas o servicios van en negativo y que no gastaste el dinero brutalmente.

Espero nunca tener que declararme en bancarrota porque no quiero que me demanden nunca. Ya se que si estoy en quiebra y no me estan demandando NO me declaro en bancarrota.

Creo que tuviste mucha suerte en perdir prestamo y que luego no te cobraran y salieras de la deuda. Eso no pasa a todo el mundo.

Excelente post.

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This bankruptcy thing is still a bit complicated for me, so many laws and bureaucracy.

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At the risk of sounding like Dave Ramsey, bankruptcy is almost never the solution. Most creditors will take pennies on the dollar if they think they are at risk of getting nothing. It is better to work your way out of it. Most bankruptcy is only beneficial for the really rich and lawyers.

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(Edited)

This particular woman was bankrupted by hospital bills due to her child having cancer or something along those lines

About 25 years ago, an American friend of mine offered to recommend me to his boss at a company in Florida. He wanted me to join the company.

As nice as the climate in Florida is at least compared to the sleet-sideways-to-the-face-half-the-year we have here, I'm glad I did not take the offer. That situation with the cost of medicine is downright scary in the US. The insurance-based system simply does not work in its current form because of the perverse incentives involved. The system seems to be optimized to take as many people as possible to the cleaners.

I read an answer on Quora by an American (a retired registered nurse) whose husband (I don't know what he did for a living) had had a heart attack. He had to spend six days in a hospital of which three days were spent at an ICU. The bill was $250,000. What the actual fuck? Perhaps there was one zero too many in her answer. She said their insurance covered "most of it".

The average cost of coronary artery bypass surgery in the US is $123,000 (just the surgery without any add-ons). In Israel, the average cost is $28,000. I checked out what a private hospital where I live charges for such surgery and the total seemed to amount to about $30,000 to $50,000 with all the charges combined. Everyone pays a heavily subsidized price at the point of delivery, which amounts to a total of few hundred euros regardless of where the operation is done.

Source: https://www.debt.org/medical/hospital-surgery-costs/

The entire developed world (WE, AU, NZ, SG, JP, SK, IL) except for the USA has healthcare systems where medical bankruptcy is virtually unheard of. The healthcare system is the single most important reason I decided against even considering emigrating to the US. The advantage of the lower tax rate seems to be more than negated by the extremely expensive insurance premiums and copays (in addition to the lack other services I would've had to pay for out of my own pocket there) and I would still have run the risk of going bankrupt.

Of course, it's your country to run as you see fit but I think it would pay to look at what other countries at a similar level of development are doing and revamp the system or modify it. Regardless who you think should be responsible for bearing the costs, there seems to be something fucked up about the incentive structure. Switzerland is another country based on Calvinist moral principles and its healthcare system seems to be working better so perhaps it could serve as a basis for a reform in the US.

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