Bankruptcy – What do you really know?
Bankruptcy has a bad reputation; it just doesn’t sound like it’s a good thing. For some, it’s ridden with social stigmas. Others have misconceptions about the bankruptcy process, which leads them to believe it isn’t worth the hassle. Some people even have inaccurate information that distorts the advantages and disadvantages.
Let’s clear up a few things. Bankruptcy is not just for people who managed their finances recklessly. Many careful and hardworking folks find themselves in over their heads with debt. Maybe you have substantial medical bills. Maybe your employer outsourced your job and you have reduced income. Or maybe you took out another mortgage to pay college tuition. Whatever the reason, you should not feel embarrassed. Bankruptcy can help you discharge debt from many sources, not just from credit cards.
Many people are under the impression they will have to go in a crowded court room and announce their financial hardship to the entire world. That isn’t true. Most individuals will only see the assigned Trustee on a single occasion. This meeting typically takes place at a single, small conference table. The vast majority of people who declare bankruptcy will never need to see a judge or set foot in a court room.
Another misconception is that you will lose all of your assets after you declare. However, most people retain most, if not all of their assets. You shouldn’t think that you will automatically lose your house and car, because that just isn’t true.
There are opponents to bankruptcy who have made a fortune selling supposed alternative solutions. One such solicitor is Dave Ramsey. Dave has the view that bankruptcy is analogous to divorce – a worst case scenario that nobody wants. He knows this because he declared bankruptcy himself, and has since made his fortune selling seminars and counseling to those in debt related financial peril.
Dave Ramsey tells his customers to pay off small debts first – to go for a “quick win” in order to stay motivated. However, no matter how high your spirits, debt doesn’t just go away because you’re motivated. Motivation will reduce neither your interest rates nor your principal. Dave’s views are appealing, yet contradictory in that he urges you make conscious emotional choices that result in smart behavior. He seems to believe the fight to pay off debts is worth more than the end result. Rather than making emotional decisions, you as a debtor should be making smart decisions. To make smart decisions you must be logical and clear headed. Contrary to Dave Ramsey’s belief, debt is about numbers.
It’s important for you to have a basic understanding of the time value of money. A common economic principle is that a dollar today is worth more than a dollar tomorrow. This is due largely to opportunity cost. The basic concept is that by having money today, you also receive inherent opportunities that come with that money. For example, you receive $100 today and invest it. The interest you receive from that $100 is money that you would not otherwise be able to obtain. If you had spent that $100 to pay down a dischargeable debt, you not only lose that $100, but all of the opportunities that are attached to it.
Bankruptcy is your constitutional right. It is a tool for relief that may enable you to clean your slate and put yourself in a better financial position. Remember, you aren’t only starting fresh, but are also investing in your future. You don’t just need to exist in a constant state of fear and anxiety with a cloud of debt over your head. The smart decision is to know your options. The longer you wait, the more you stand to lose. Bankruptcy may be that tool you need to get back to enjoying life.