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Does filing a bankruptcy make you a failure?

No!!! In the summer of 2009—after the economy collapsed due to the rampant fraud and corruption of Wall Street—General Motors filed a chapter 11 bankruptcy. Not only did this bankruptcy filing for GM help the owners of GM (the shareholders), it helped all the employees, and all of the companies that do business with GM, and everybody who has a retirement account that has GM stock. Millions of people—and the economy as a whole—benefitted from GM’s bankruptcy filing because it helped them to stay in business. Indeed the bankruptcy laws exist to help individuals and/or businesses, but also the economy/country as a whole.

The two main bankruptcies for individuals are chapter 7 and chapter 13. If there were no bankruptcy laws and people couldn’t file a chapter 7 or chapter 13 when appropriate then the country as a whole would suffer because there would be hundreds of thousands of more people in the country working under the table to prevent their wages from being garnished (and, thus, billions of dollars less tax money for city, state, and federal governments). Also, these same hundreds of thousands of people would put very little or no money in bank accounts since their bank accounts would be vulnerable to garnishments. This would significantly hurt the economy because one of the ways that money is created in this country is through fractional reserve banking. This means that for every $1 in the banking system in this country, $10 can be lent out (i.e. created). Thus, if there are billions of dollars less money in the banking system, then there would be ten times that less money in the economy for mortgages, car loans, business loans, private student loans, credit cards, and personal loans. Thus, just like the chapter 11 and GM example, the country is much better off with chapter 7 and chapter 13 because it gives hundreds of thousands of people annually a way to protect themselves and obtain a fresh start without having to work under the table and not utilize the banking system.

Words are powerful and “bankruptcy” is a powerful word with negative connotations and that is where most people get the erroneous idea that filing a chapter 7 or chapter 13, when appropriate, means that they are a “failure.” The bankruptcy code, which includes chapter 7 and chapter 13, is not the same thing as the word “bankruptcy.” Indeed the word “bankruptcy” exists independent of the bankruptcy code and if there were no bankruptcy laws there would still be a word “bankruptcy.” When Congress created the bankruptcy code, they could have named the law anything they wanted (e.g., The Fresh Start code). The name of a law is insignificant. What matters is what the law does. Congress could pass a law call “The Freedom Law” but the law itself could take away many freedoms. Unfortunately, many people conflate the word “bankruptcy” with the federal bankruptcy code and then attach the negative connotations of the word “bankruptcy” to the bankruptcy code. The important thing is to separate the word “bankruptcy”—and its negative connotations from the federal bankruptcy code. And then analytically look at the individual’s situation and what the law can or can’t do for you and what the real ramifications of filing a chapter 7 or chapter 13 are.

The reality is that many people who file a bankruptcy see an immediate improvement in their credit score, which will continue to improve after the bankruptcy with positive post-filing credit history. Also, almost everyone who files a chapter 7 or chapter 13 when it is appropriate for them will experience immediate psychological benefits of not having to stress about tens of thousands of dollars owed, harassing phone calls, lawsuits, and garnishments. To provide context of the real ramifications of filing a bankruptcy, debtors are immediately inundated with solicitations from car dealerships immediately after they file (I’ve had clients finance new cars within days of a chapter 7 filing). Also, one year after filing a chapter 13 or two years after filing a chapter 7, the debtor can obtain an FHA or conventional mortgage on normal terms. The important thing is to start establishing a positive post-filing credit history after the bankruptcy, which is easy to do (e.g., obtaining a small secured credit card from a bank).

The banks that lend out money via credit cards do so with money that didn’t really exist in the first place based on the legality of fractional reserve banking. All of the vendors of the debtor were paid by the bank from money that was literally created out of thin air via fractional reserve banking. Indeed banks have every incentive to inundate the country with credit cards and give out far too much credit then they arguably should because this is one of the ways that the banks create money for themselves. This doesn’t mean that we don’t have responsibility for our actions. Most people are honorable and have every intention of paying back money. But life happens and economies collapse (sometimes due to the fraud and corruption of Wall Street), jobs are lost, illnesses happen, etc. The bottom line is that chapter 7 and chapter 13 exist to help individuals when appropriate and also help the country. And if based on an individual’s circumstances, it is appropriate to utilize the detailed and intricate statutory framework commonly referred to as bankruptcy law, then that is what Congress intended. And that is what is good for the individual and the country. And that does Not make the individual who filed the chapter 7 or chapter 13 a failure.

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