October 23rd, 2006 11:07 am
To BK or not to BK… Moral Issues of Bankruptcy
With almost $140K in unsecured debt (which is part of my total 2.2M of debt), I am now facing the question: to go through bankruptcy or not?
Lots of you have suggested that I just go ahead and BK and start fresh. Many of the most successful entrepreneurs have gone through bankruptcy at one point in their career… right?
My minimum payments on my unsecured debt are almost $4,000 per month. The mortgages and utilities on 5 houses are $10,000 - $15,000 per month. I am 2 months behind on the credit cards / credit lines and 4 months behind on the mortgages. So it will take $50-100K just to catchup!
I looked at the standard debt reduction techniques (”debt snowball”, etc) and they don’t seem to apply for my case. If I was to put my tech skills to use and go back to a programming job (4-5K/mo), I would simply not have the ability to float even my minimum payments.
I have also been looking for creative ways to catchup/repay my debts via wholesaling and selling my houses via a seller financing, etc). Thank you for all your feedback too. I received many good ideas from my readers. Look through the comments and you’ll see.
The creative ideas are not bad… I’m sure some of them will work… but they take time to develop and implement. To float my debt, I need quick cash now. Wholesaling / bird-dogging for other investors for 5-10K assignment fees is a good idea. I will be working with my Rich Dad to really learn how to do it right. However, that too will take a while before it gets off the ground.
In the mean time the lenders keep bugging me me with multiple phone calls per day, and lots of angry letters. The past due balances keep rising. My credit score is going down the drain. And the pressure of all this debt has been very overwhelming.
Moral Issues of Bankruptcy…
One one hand it feels like “weaseling” out of my responsibilities. On the other hand, if I take the bankruptcy route and wipe off my debts, I can focus on rebuilding my real estate business and moving forward.
Since I want to do the right thing and please my Maker, I am giving the moral issues extra consideration.
Dave Ramsey in The Truth About Bankruptcy says:
Myth: I’ll just file bankruptcy and start over; it seems so easy.
Truth: Bankruptcy is a gut-wrenching, life-changing event that causes lifelong damage.
The Christian Science Monitor in The Moral Burden of Bankruptcy compares the two views from a biblical perspective:
To make this case, bankruptcy’s critics often cite Psalm 37:21: “The wicked borrow and do not repay, but the righteous give generously.” From sources such as Crown Financial Ministries and Dave Ramsey’s nationally syndicated radio show, advice seekers hear they have a duty in most cases to keep their payback promises even when life throws them a curve ball.
But another school of thought sees a more complex picture in which lenders also face admonitions to forgive debts. For instance, Jonathan Alper, a bankruptcy attorney in Orlando, Fla., reminds distraught clients that the American legal tradition of allowing for bankruptcy stems from Deuteronomy 15:1-11, which calls for debt forgiveness every seven years. Others agree with Mr. Alper that those who are able should repay, but those unable to do so should not feel guilty.
The most obvious form of legal amnesty is bankruptcy, at the heart of which lies a simple behavioral phenomenon with an interesting twist. The simple phenomenon is this: A debtor who is already in over his head will not pay, whether or not there is a legal mechanism for discharging his debts. There is a kind of Laffer curve of debt: A little bit tends to be repaid; a lot tends to be ignored. (Hence the old saying that if you borrow a little money from a bank, the bank owns you, but if you borrow a lot of money, you own the bank.) This simple phenomenon has a simple explanation: If all or almost all my future income is going to go to my creditors because I am drastically overextended, I have no incentive to work. I’ll starve if I work (because my creditors will take everything) and I’ll starve if I don’t—but at least then I’ll starve without having to work. By demanding everything, my creditors will get nothing, because I am in a hole too deep to dig out of.
The temptation is to say, it can yield nothing else—the debtor who is in way over his head can’t and won’t pay, so “forgiving” the debt is really just an acknowledgment of reality. But that ignores another option, one the law embraced not so very long ago. In the early years of our nation, debtors who would not or could not pay were imprisoned—a very common rule in many legal regimes going back to ancient times. Recall Jesus’ story in Matthew 5: “You shall not come out of there until you have paid the last cent.” Imprisonment for debt is really quite logical: When ordinary civil remedies no longer work, the system should, one might think, resort to more serious punishment. And the truly improvident debtor has often borrowed money he should have known would be beyond his ability to repay. This is akin to theft, and in modern legal systems theft leads to imprisonment. This points up the real choice the law faces when a debtor is in over his head. The law can of course wipe out the debt, as it does. But it can do something else instead: it can wipe out the debtor.
A New Chapter (7) in my Life?
I recently met with two bankruptcy attorneys and ran my situation by them (including liar loan issues). They see no reason why I can’t just go with bankruptcy right now and wipe off all my debts. Since I am NOT trying to protect any assets, Chapter 7 bankruptcy is the recommended option for me.
Note, bankruptcy will not wipe out the liens on the properties - just my obligation to repay the note. So the lenders will continue with foreclosure. But bankruptcy can stall the foreclosure process by 1-3 months. That may give me extra time to sell the properties and pay back the lenders as much money as I can. I want to minimize the loss to my lenders as much as possible.
With the moral issues in mind…
Should I BK or not? What do you think?