Don’t let detractors play the shame game: Bankruptcy is a business decision, not a sign of moral failure

August 20th, 2009 by Mike Hinshaw

Although filing for personal bankruptcy is a serious matter, it need not involve either guilt or shame. It’s a business decision. Of course, anyone considering such a profound business decision should consult an experienced attorney.

But don’t let anyone lay a guilt trip on you. As Brett Arends writes in July 24 “Personal Finance” entry at The Wall Street Journal online, “I don’t want to encourage irresponsible behavior. But I don’t write the laws, and they are there for a reason.”

Indeed. As he points out, “too many people are talking about bankruptcy as if it’s a sign this country’s social safety net has failed.

“It isn’t. Bankruptcy is part of the safety net. Other countries have welfare states, America has bankruptcy. And so long as you plan ahead, it doesn’t have to wipe you out.”

Besides provding insight into discrete details of the law, an experienced counselor can also help with the timing of your filing. For example, say your situation is so bad that it also involves a divorce. Well, for one person it may better to go ahead and file before the divorce is final. For another, waiting a bit may be the better course.

Regardless, a well planned bankruptcy proceeding can provide many forms of protection. Here’s Arends again: “If you are smart you could get through a bankruptcy filing and still keep your home, your retirement savings, the childrens’ college funds, your car and your personal effects. Amazingly, according to a recent study by the Federal Reserve Bank of Boston, you may even get your credit cards back pretty soon — whether that is a good thing is another matter.”

In addition to varying degrees of protection via homestead exemptions in many states, the code also can help shelter numerous other assets: “Money in pension plans, including a 401(k), should be secure from creditors. The same is true for money in an IRA in amounts up to $1 million. If you have children or grandchildren, money in 529 tax-sheltered college savings plans becomes secure two years after deposit. You can contribute $65,000 per child to your 529 plan this year without triggering gift taxes, or $130,000 if you’re a couple. You retain control of the money in the plan, too.

“Life insurance products, including retirement annuities, may also be protected, though rules vary by state.”

From a more recent piece in Parade, here’s some more good news: Although a Chapter 7 filing can remain on your credit report for as long as 10 years, “you can still bounce back and reestablish a good credit rating. So if bad circumstances—or tough decisions—have led you to file, don’t despair. In a best-case scenario, after having your debts discharged by a court, you could qualify for a car loan with good rates in a year and a mortgage in two to four years.

The Parade piece also lists specific steps to take; following are the highlights, excerpted without all the details:

“According to attorneys and consumer advocates, the path back usually involves careful steps to reestablish creditworthiness. Here’s what to do.

1. Start with one credit card. Get a card with the lowest possible fees and accept a spending limit as low as $250.

2. Make prompt payments 100% of the time.

3. Ask for lower rates, especially as your credit improves.

4. Avoid “credit-repair” schemes.

5. View a car loan as the next big step.

6. Keep balances under control.

7. Plan for a mortgage.

Also remember that filing for bankruptcy protection stops the harrassment and threats. Like any major business decision, it requires effort and thoughtful consideration.

But not guilt.