Bankruptcy: Is This Going to Hurt?

This year, more than 730,000 businesses or individuals are expected to use bankruptcy to wipe out or reduce their debt, according to the US Trustees Program. But despite trends and numbers — and no matter how common bankruptcy may be — there’s no comfort in solidarity when a person is faced with mounting financial pressure. It’s a situation that can make you feel uniquely alone.

The Federal Reserve cited an overall household debt of more than $13 trillion by the end of 2017; the bulk a result of mortgages ($8.8 trillion), followed by student loans ($1.4), car loans ($1.2), and credit card debt (at a meager $1 trillion). For people and businesses who are unable to pay their debts in full, filing for bankruptcy and using it to wipe out incurred debt can seem like a second chance. Others worry about the repercussions to their credit and can’t quite decide if bankruptcy is a curse or a cureall.

John Longo, an attorney at Citadel Consumer Litigation in Providence, has 20 years of experience in bankruptcy procedures and says, in that time, he’s never seen bankruptcy remorse. “There’s a lot of fear about bankruptcy,” Longo says. “People think they’ll have to give up their house or car or they won’t have credit for 10 years. None of those things are true. People also fear their neighbors or jobs will find out. That’s not true either. There’s fear, but I’ve never had a client go through a bankruptcy and say, ‘I’m sorry I did that.’ In 99% of the cases, they’re surprised how painless it was. 100% have been relieved that they did it.”

If you’re going down, know when to pull the ripcord.

According to Longo, it’s better to declare bankruptcy while on an upswing — not when you’re in a financial spiral. Because while bankruptcy eliminates the debt you incurred before filing, it doesn’t

put any more money in your pocket or help meet living expenses moving forward. “I’ve seen people who don’t have health insurance who are about to go back to work and want to put it behind them,” Longo says. “But they don’t go back to work; they might get laid off. Then they’ve incurred a bunch more debt that they can’t work their way out of. You can only file every 8 years.”

Even if panic starts to set in, in the face of mounting calls from creditors, Longo reminds clients that they generally don’t have to file for bankruptcy immediately because “there’s nothing creditors can do to get money out of you, except garnish your wages or bank account. They can never take your unemployment, they can never take your social security. If that or TDI is your main source of income, you don’t have to worry about creditors garnishing money, because they can’t. They also can’t garnish wages for a year after you stop getting public assistance, which includes unemployment. So if you stopped collecting and got a job paying $100,000 a year, they still can’t garnish your wages. Until you’re confident that you’re on your way up financially, there’s generally no reason that you have to file.”

It’s not a rich people or corporate problem.

The headlines we hear about most often include examples like Toys ‘R’ Us and Donald Trump, but bankruptcy affects all on the economic spectrum. Longo is quick to identify the most common source of financial woe for the majority of Rhode Islanders: an event in their life that they didn’t have control over.

“It’s a divorce, an illness or long-term unemployment. What typically happens is they can’t adjust their spending quick enough,” Longo says. “One of those three things happen and they can’t stop their mortgage, credit card bills or kid’s tuition. They go into debt to try to maintain that standard of living and they can’t. The debts pile up and six months to a year, sometimes 2 or 3 years later, they come to me with over $80,000 worth of debt that they incurred. What’s really sad is when they come to me in a situation like that and they depleted their 401K. They have to go bankrupt and now they liquidated their retirement. They would’ve been better off not paying those bills and letting it pile up.”

If it seems like bankruptcy is a magic button used to escape legal responsibility, in practice that’s rarely the case. “In my 20 years of doing bankruptcies, I’ve only seen maybe two people who were trying to game the system and trying to run up their credit card, thinking, ‘Oh, I can go bankrupt!’” Longo says. “It’s always something that went on in their life that they couldn’t keep up with.”