First off thanks for your blog. I read it regularly. I do have one question about living within ones means, as I have been doing by default(bad credit).
After many attempts to dig out of debt and be debt free minus the needed bills- car ins., utilities, etc. I have fallen into a somewhat unique scenario. I had an employer file bankruptcy and eliminate any chance of COBRA health ins. shortly after being unemployed, I had an emergency surgery to the tune of $70,000. Since that time I have been accumulating massive medical debt, despite currently having health ins. My question is how can I justify continuing to pay a mortgage payment of debt? After all the different payments to different doctors even at modest monthly payment are added up, I cannot manage a $700 monthly payment on my modest salary. Bankruptcy is not a word in my vocabulary, but is it something I should look into? I have been paying some of them regularly, but am only paying the interest at this point.
As far as planning for any emergency, if I get $10 a week set aside, I am having a banner week, but some medical issue comes up my puny savings is wiped out again. I don't know if I am looking for insight or just venting so I do not shoot off all my bullets saved for a different day.
Thanks, DS in NJ
DS, First of all I just want to convey my sympathy for the rough situation you are in. Life can sometimes bring bad things at the time we are least capable of dealing with them. Anyway here are the issues I see. First is ethics as they apply to debt. Maybe it is ridiculously antiquated but I believe when you borrow or are advanced goods or services you are giving your word to honor it and pay under the terms of the agreement. I believe that you should think about these choices and if you can't repay then don't borrow. However as we mentioned things can happen. People can make reasonable (maybe not text book perfect but certainly not bad) decisions and still end up in a rough spot. Particularly when we talk about medical problems or the current climate of seriously long term job loss bad things can happen to good people who made solidly normal choices. I believe that we have bankruptcy laws for a reason. Folks can through bad luck, bad choices or some combination thereon get into a situation where they are not going to be able to repay their debts. Instead of people just not paying debts they can't pay anyway we might as well make it legal and let them, in time, move on with their lives.
Ethically I believe if you can afford to pay back your debts you should do so. [I find the concept of "strategic bankruptcy" and its passive friend jingle mail, provided you can afford the mortgage) completely unethical.] This debt should come after the basics like shelter, food, utilities, fuel, etc. Being homeless and sleeping in national forests with an empty stomach so you can try to pay off debt, while a dramatic choice, is probably a bit extreme. This debt should however come before luxuries like expensive entertainment, electronic gadgets, cool new guns, new cars, travel, etc.
I do not think bankruptcy is something to be proud of. Personally if I had to declare bankruptcy because I made a whole bunch of stupid choices I would be really ashamed of myself. However if I found myself with huge medical bills which got racked up over an inopportune time; or faced for whatever reason a drastic and permanent drop in income I wouldn't feel super happy about my situation but wouldn't look at myself negatively. Sometimes stuff happens to you and you just move on.
Speaking to your situation pragmatically. Without knowing all of your information (savings, debts, income, interest rates, etc) it is hard to say anything specific. I do not have all the information. To be honest I am not a professional financial anything and beyond generic thoughts I can just suggest you consult a professional. I would certainly at least look into bankruptcy. Go see a professional and run the numbers. Take some time and think about the second and third order effects of both scenarios; paying these debts and potentially filing bankruptcy then make a decision.
I wish you the best,
Ryan
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13 comments:
life and death medical decisions are made under duress. your hospital bills are probably way over the actual cost of your care... maybe you can negotiate a reduction.
the bankruptcy will remain on your credit report for ten years, and remains in effect for seven. during those seven years, you won't be able to file again. (discuss with an attorney, or at least read up on the subject at your local library) you will be on the hook, for new debts you incur during that time. your credit is already shot, but that's a good thing. you have probably gotten over thinking of luxuries as being necessities. likely you're paying cash, or using debit cards only. the laws will often allow you to keep your car, and sometimes your home.
the seven year period is biblical, by the way. under the "Law" slaves and debtors were released after seven years.
Dear DS,
I am sorry about your situation. You would be surprised how incredibly common it is.
After reading your post I had a few thoughts and ideas:
1) Have you tried contacting the financial dept at the hospital and getting your bill reduced? This approach wires fir some people in some situations.
2) If contacting the financial dept doesn't work then try contacting the different doctors on an individual basis. For example: call the anetheologist to reduce his bill, call the cardiologist to reduce his bill, etc.
3) Declaring bankruptcy is not the end of the world but it will change your life in very significant ways. For several years you may be unable to get a credit card, a loan of any sort, possibly a job(if they require credit checks), an apt. ( if they require credit checks), etc. The good news is that you CAN have a life after bankruptcy. Find a good lawyer specializing in bankruptcy. Take his words seriously.
Good luck. It's not the end of the world. Life will go on.
Sam
I'm going to differ with Ryan and say that I don't think declaring bankruptcy is necessarily unethical. I would instead look at it as a cold hearted cost-benefit analysis. If the benefits to bankruptcy outweigh the costs, then it is probably a decent idea. After all, a corporation/business can declare bankruptcy with no moral qualms; if you view your financial life like a business then it should be the same sort of deal.
However, there are major costs to consider. Under chapter 7, you'll lose all of your stuff other than a few protected items. You can only file once every 7-8 years so you better figure out a better way in the future. It will stay on your credit report for TEN years. The advantage is that it wipes the debts out.
Chapter 13 costs you more but is more responsible. You can keep your stuff. The courts set up a five year plan for you to repay your debts. The advantage of this plan is that you keep your stuff (house, car, etc), you can get rid of debts that Chapter 7 can't erase, and maybe feel better about yourself. The downside is that you need to be able to realistically pay.
I think you should check your credit score. If your credit is already trashed (with no sign of realistic improvement in the next decade) then bankruptcy might be a more attractive option. You should also talk to a financial planning expert and/or an attorney that specializes in bankruptcy law.
Bankruptcy is certainly not a "get out of jail free" card. It will trash your credit for a decade, which means no house, no car loans, no student loans, no credit cards, and possibly even trouble getting a rental or job if they check your credit.
The other alternative would be to stop the bleeding:
1) Roll all your debts into one, lower interest rate, consolidated loan.
2) Get adequete insurance, at least catastrophic insurance.
3) Establish a 3 month emergency fund.
4) Improve your insurance.
5) Start paying down the highest interest rate and non-tax advantaged debts.
6) Establish short term cash reserves for a number of months equal to income in tens of thousands (i.e. if you make 50K you should have 5 months on hand).
7) Start aggressively paying down the remainder of the debt.
However, if you look at your situation and decide that there is no realistic way to get out from under the debt in a decade then bankruptcy might be a better choice. Talk to a professional!!!
I'll be captain hindsight here for a moment and suggest that this is a reason why catastrophic insurance (health, car, property, etc) is vital for EVERYONE, even the young and healthy. Something with even a $5K deductible will protect you from this situation and the monthly cost is not that high. Although of course the new health care law pretty much kills this plan, I think.
Cheers,
Chris from AK
Depending on how strongly you feel about it, you could still repay legitimate debt after a bankruptcy, if you were ablt to...but the bankruptcy would at least stop the interest accumulation.
Well said Tor. I was forced into a similar bankruptcy 20 years ago ($250,000). I did everything in my power to avoid it for almost five years. For what its worth, I learned some pretty harsh lessons in the process.
Your integrity is a weapon for the courts and creditors. Rule number one is to shut up. Number two is to get it over with when you find it is inevitable.
A week before my court date I was paid $5,000 owed to me. By that time I'd been stripped of every dime and penny. There was zero concern if I could feed my family. In court you have to declare every last nickel you have, and then give it up.
That $5,000 would have made little difference to the creditors, it would go to the court appointed guy who divides it up for the creditors as a percentage ($5,000 is 2% of $250,000 - each creditor gets 2% of their due), keeps a piece for himself, and it is gone forever. Then you have to pay income tax on it later. Therein lays the moral dilemma. I do owe the money, but there is no provision for my family's basic (and I do mean basic) requirements of life. I would not lie and deny the money either. Crap.
So in the end, we spent every dime of that money on what we nowadays call preps. We had food and the necessities to get through that mess and get our lives back together.
There were some creditors that were unbelievable jerks. Others were just folks dealing with our situation as best they could. Over the course of another five years I /privately/ repaid the goods guys /with cash/. If word got out that I repaid anyone anything the entire bankruptcy would become null and void.
You do what you can of course. But never forget that in bankruptcy your family is not a consideration by anyone but you. As far as personal honor goes, you do the best you can to the max of reasonable prudence. But your first responsibility is your family.
Ethics (also known as moral philosophy) is a branch of philosophy that addresses questions about morality — that is, concepts such as good and evil, right and wrong, virtue and vice, justice, etc.
Buying a property, whether for business or as a residence is not an ethical decision or a promise, it is a contract. The contract states that you will pay XXX amount of money on a certain schedule, and if you fail to meet that schedule, then you agree that the bank can take back the property after following the correct procedure.
No matter what the type of property you have (business or residential), the only real question is "would you be better off of with or without the property?".
If you have a lot of value in the property, saving it or selling it would be the best recourse. If you are underwater on the property, you have to evaluate the costs of letting the bank foreclose, the loss of value in your credit score and any future property purchases, and the possibility of any debt hanging over your head for years to follow. If your calculations tell you it's better to let the property go, then let it go.
The Mortgage Brokers Association recently let their building be foreclosed on because it wasn't worth what they owed. Many other businesses and millionaires have let their property be foreclosed on. Ethics has nothing to do with it.
As far as bankruptcy goes, it's something you have to weigh the pros and cons of. But, once again, not ethics, not good vs. evil, just basic business and economics.
I sense some desperation in DS's situation. I would recommend he call Dave Ramsey's radio show, 2-5 PM weekdays, and try to talk to Dave about his problems. The number is 888-825-5225 and via internet here: http://www.daveramsey.com/radio/home/
H
DS, as Ryan stated I would also like to convey my sympathy for your current circumstances.
On the point of the size of your medical bills I would highly recommend you research your state and 'balance billing' immediately. There are cases where physicians, hospitals, etc. attempt to bill you for the 'remainder' above the negotiated balance and in some cases it is in direct violation of state laws. Each state is different so please DYODD.
Once you understand your rights there talk to the hospital and doctors to start a process of debt negotiation and payments. We did this ourselves years ago and have had a couple of friends do it as well. Depending on the debt and your whole financial picture (401k, other assets, etc.) the reduction can be significant.
Pay the s.o.b's $10 to $20 dollars a week. They will take it and you can make them by doing so in good faith. I have no medical insurance on my wife and we have massive bills due to her having her history removed. The most I write a check for (is several of them for) $25.00/ month. Believe me they will accept it rather than going to court with you where do to your circumstances most likely they would consolidate the bills and give you one low monthly payment. I would not even worry too much about a medical bankruptcy as that can be out of your control. As Ryan stated sometimes (better than I can) "shit happens".
Ryan,
I've got to disagree with you somewhat on the moral bankruptcy of failure to meet your debts. I have no real problem with a "strategic" default by individuals. I do have a problem with fraud; if someone intentionally loads up with excessive debt then says "screw you" and walks away, never having had an intent to pay back anything, that's a problem. In theory, though, lenders should tighten up lending standards and not lend to people who are likely to default, and there should be cases for fraud if people deliberately misrepresent themselves or lie to get credit.
Declaring bankruptcy carries significant consequences even if we no longer have debtor's prisons. It will trash your credit for a decade, making it hard or impossible to get car loans, mortgages, or other credit. Many places including employers and landlords check credit as well. Chapter 7 bankruptcy can't erase every debt, either.
I'd advise the reader to consult a professional, either a CPA or an attorney specializing in bankruptcy law or both. It may cost a few hundred bucks but if you are seriously thinking about either trashing your credit via bankruptcy or coming up with a reasonable plan to tackle this enormous monkey on your back, professional help is what you need.
Cue Captain Hindsight here -- I think this highlights the importance of properly insuring yourself to protect your assets (I'm including a clean credit score as an asset here). Everyone, even healthy young people, should have some sort of inexpensive catastrophic health insurance, even if it has a $5K deductible (sidebar: too bad that sort of coverage will soon become defunct). Likewise, everyone needs liability coverage on their auto policy, and everyone needs a renter's or homeowner's policy with adequate liability protection.
That's why getting adequete insurance is something I suggest as a high priority on par with establishing an emergency fund (http://armaborealis.blogspot.com/2010/04/personal-finance-101-get-your-shit-out.html).
Cheers,
Chris from AK
Former banker talking here:
I think the debt and your response falls into two categories - secured and unsecured.
For unsecured debt - nothing is pledged for getting the loan - you find a way to pay it back. Period. Your word is your bond.
For secured debt - including the "jingle mail" Ryan discussed, it's a whole 'nuther story.
You and the lender made a deal that you would pay the loan based on the terms agreed upon, AND if you didn't, they'll take your house, car, boat - whatever. Repossession was a part of the deal.
Part of the banker's due diligence is to ascertain that the secured property will have enough value to repay the debt in the case of default. It's what their shareholders are paying them to do.
If it doesn't and the bank takes a loss, that's bad on the banker that made the loan, NOT on the borrower who was relying on the expertise of the banker to properly value the property.
The whole point to bankruptcy is that we all screw up, we all get into situations that are over our heads, and we can have a chance to start over. That's what your employer did when they declared bankruptcy.
If you declare bankruptcy your credit will be completely shot for a good long while (I think the bankruptcy stays on your record for 7 years). You wont be getting a car loan; you wont be getting a home loan or a credit card.
The laws very from state to state and very depending on how much income and assets you have. Make sure you know exactly what you're getting into if you file.
Everyone that you owe money too took a risk in loaning you the money or service they provided. They understand that they might not be getting their money back or their service paid for. That's all part of the deal.
I'm with Ryan, if you can pay your bills you should pay your bills and if you can't afford something you shouldn't buy it. But, as the saying goes, shit happens. If I have a choice between racking up big medical bills that I know I can't pay and death, I'll take the bills and file for bankruptcy. It's not even a question.
If I was in your spot, I'd file.
On a better note, I hope you're doing well and life's looking up.
Whoo, sorry for the double post with similar content. I thought the first one got sucked up into the ether.
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