Nobody stays on a diet for five years, right? Yet, so many people I talk to about bankruptcy are chomping at the bits to file a Chapter 13 - which is like volunteering for a three-to-five-year diet - when they could file a Chapter 7 (and be finished with the whole case in just over three months.) Why is that?
The "Why", is that we Americans are optimists to a fault when it comes to money. Reluctance to file bankruptcy is hard-wired into us culturally. In America, as a culture, we have for years been addicted to optimism. "Stock prices WILL go higher!", we believe(d?) "Real estate prices are always a sure bet!" "If the economy is in trouble, not to worry: it'll be better soon." Or so we thought.
Plus, Americans are unrealistically moral about money. As a result, when we fall behind on bills even when it's a result of a layoff, we feel guilty, as though we must always be personally responsible for the misfortunes that befall us.
Sixteen years of talking to people in desperate financial straits has convinced me that it is the combination of optimism - sometimes to the point of what Alan Greenspan called "irrational exuberance" - and the desire to live up to the American model of the self-sufficient rugged individual which cause many to stumble. Borrowers keep getting deeper and deeper in trouble, figure it can't get any worse, then it does, then figure it can't get any worse than THIS, and it does, etc.
When the borrower hits that awful place where things MUST get better but the borrower's circumstances just aren't cooperating, the borrower figures if he / she takes just a little emergency withdrawal from retirement funds to tide her over, that will do the trick. Too often, that just compounds the problem in oh, so many ways. It triggers a nasty penalty, taxes on the withdrawal, and becomes a slippery slope.
It's this aversion to accepting help from an unconventional source (or from ANY source, for that matter) combined with a sometimes misguided compulsion to do the "right" thing, I think, that cause people to hesitate to accept ALL the help available to them in bankruptcy. They stop short of complete relief, opting for a Chapter 13 instead of going all out and leaving all their debt behind in a Chapter 7.
It's as if the borrower doesn't feel "entitled" to such radical relief. I think of it in fairly dramatic terms. Debt is like a cancer. Given a choice of life-saving surgery which will quickly and safely remove the dangerous tumor, the borrower who opts for a Chapter 13 instead opts for a lengthy and painful course of radiation and chemotherapy, with a two-out-of-three chance of FAILURE. Fully two thirds of Chapter 13 cases end early and incomplete, useless to the borrower. For those who have a compulsion to repay debt based on moral or religious grounds, I say, go ahead, do it if you can. But at least if the debt is discharged in a Chapter 7 bankruptcy, you can do it on your own terms, instead of worrying about ugly letters and phone call, lawsuits and the like.
When deciding what is the "right" thing to do, consider first that the bankruptcy laws ALLOW most people to keep what they have. And apparently the same people who wrote the bankruptcy code to make it tougher to get relief nevertheless figured it's better to have every citizen able to support himself in retirement, rather than, say, draining the federal coffers. So, bankruptcy filers generally can keep very sizable retirement accounts and still file bankruptcy. Sure, it will feel like a failure at first But only at first. That feeling is replaced by relief and peace. There's light at the end of the tunnel, and hope of a better life.
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