Dirty Little Secret: The Stigma of Bankruptcy

Written By: Ron Lundquist

As financial professionals, it is of course incumbent upon us to provide advice
to clients that will improve their financial situation. That advice might be to pay more than the minimum monthly payment on credit cards, or to make sure that income tax exemptions properly reflect reality, so a client does not overpay or underpay their tax responsibility, or recommend a refinance or a mortgage loan modification. It may include helping a client budget expenses, or to recommend using a debt consolidation service. And yes, it may also mean advising a client to file bankruptcy.

It is understandable that some financial professionals shy away from providing such advice. Bankruptcy is not for everyone, nor should it be. However, for some clients it really is the best tool in your inventory. Generally speaking, a consumer debtor may qualify for either a Chapter 7 or a Chapter 13 bankruptcy. A Chapter 7 case will discharge all dischargeable debt with no repayment from the debtor. A Chapter 7 is relatively brief, most cases are completed within 90 days of a case being filed. A Chapter 13 bankruptcy entails repayment based on several factors including the debtor’s ability to pay, the level of non-exempt assets a debtor may have as well as the nature of the debt involved. A Chapter 13 generally has a payment period between 36 and 60 months.

Too often, when I discuss the work I do with financial professionals, I am met with the perception that clients who file bankruptcy are to blame. There is a stigma associated with bankruptcy that implies some failing, flaw, and/or guilt on the part of the bankruptcy filer.

Nothing could be further from the truth. Yes, every now and then a scam artist files for bankruptcy. And that scam artist taints the system for those who need legitimate relief. And, since creditors don’t want people to file bankruptcy, the stereotype
of bankruptcy clients as lazy or dishonest or criminal is perpetrated.

However, bankruptcy fraud is the exception and not the rule. In 2009, there were 1,473,675 bankruptcy filings in the United States. Of these, only 1,611 criminal referrals were made by the United States Trustee (a division of the Department of Justice that administers bankruptcy cases), and of those, just 24 resulted in formal criminal charges.

So fraud and bankruptcy don’t go hand in hand. People file bankruptcy for many reasons—like divorce, a roommate moved out, a job was lost, illness or disability, or someone who was needed for financial security died. They file bankruptcy as a last resort, after they have cashed in retirement plans, or borrowed money from friends and relatives, or have sold non-essential goods to pay the bills.

Bankruptcy exists because we deem it a societal good to give our fellow citizens a second chance. Anyone could become the face of bankruptcy, depending on whether the winds of fortune blow ill or good.

Too often when I discuss the work I do with financial professionals I am met with the perception that clients who file bankruptcy are to blame.

Let me explain. Every two weeks at the U.S. Bankruptcy Courts in Minneapolis and in St. Paul, the Volunteer Lawyers Network and the bankruptcy court sponsor the Bankruptcy Advice Clinic. The clinic gives potential filers 15 minutes each with a bankruptcy attorney to discuss their case.

On one occasion when I volunteered over the course of 2.5 hours, I met with 14 people—perfect strangers who instantly revealed their deepest secrets, their hopes and fears, their victories and defeats, proclaiming the worries that kept them up in the deep of night. For some, the discussion was cathartic.

If their stories were boiled down to headlines, how would those headlines read? Here are examples:

• “Unemployed father of 6 soon to lose unemployment compensation; has already depleted 401(k), has no remaining assets and is desperate.”
• “About to be homeless single mother wonders if bankruptcy will stop eviction in process.”
• “Failed businessman who plowed life’s savings into defunct venture seeks bankruptcy guidance.”
• “Man who was the picture of health one year ago now riddled with cancer, has reached the maximum benefits on his health insurance, and has medical bills that top $100,000.”
• “Disabled woman scared to death by $49,000 judgment against her for second mortgage on house she never should have been suckered into buying in the first place.

”These are the typical stories of people who file for bankruptcy. But these headlines aren’t lurid or glamorous. They aren’t about wealth or fraud or crime. They are about bad things that happen to ordinary people who are blindsided by life.And so, every time after I have heard my client’s tale, and my eyes lock with theirs, I am haunted by the thought that there, but for the grace of God….