In today’s Los Angeles Times, Tom Petruno’s (@tpetruno) article entitled, Debt Threat Looms, again, he warns us of inevitable business cycles and where the economy is headed. You see, in order for the economy to move full steam ahead, we need to continue to spend money. The problem with that concept is that we’re so buried in debt, we can’t spend any more. Besides, many American’s incomes have not kept pace with increased costs of goods and services. Even the government’s efforts to keep interest rates low, has not helped. It’s not a matter of “if,” but rather, “when.”
According to the article, ancient Babylonian kings had a special too at their disposal when economic or social conditions turned dicey: They would declare “debt jubilee” and instantly wipe out borrower’s loans, allowing average people deep in debt to start over with a clean slate. Sounds too good to be true? That is bankruptcy; a fresh start for the honest, but unfortunate debtor. And, remember the talk about business cycles? The business cycle is the fluctuation in economic activity that an economy experiences over a period of time. A business cycle is basically defined in terms of periods of expansion or recession. [Source: Investopedia] In decades past, a business cycle would occur every 5 years or so. Then, a cycle increased to about every 7 years when the credit card was invented and became a household name. The last business cycle lasted 10 years because of the toxic mortgages that were sold en mass to many who could not afford them. Interestingly, a debtor is permitted to file bankruptcy One (1) time every Eight (8) years, which correlates to this “Debt Jubilee” put on by the Babylonians.
The major holdup seems to be student loans. Student loan debt has more than doubled since 2006 and now totals $1.35 Trillion dollars. In the wake of this looming crisis, there are rumors of a forgiveness of federal student loans; a defense to repayment of your student loans for the bad acts of your school, may soon become a viable; the ability to request loan forgiveness due to a school’s illegal action. [Source: The Hill] If this new loan forgiveness option becomes effective, then we may also open more doors for bankruptcy hardship discharge standards for discharging student loans in bankruptcy.
An argument could be made for the discharging to student loans on Undue Hardship when illegal actions of third parties make your education useless, or your degree worthless. This would support an argument under the Second prong of the Brunner test, which requires circumstances beyond the debtor’s reasonable control, to be present, such that it makes it impossible for the repayment of his loans. I’ll take that argument into bankruptcy court.
So, while the economy continues to sputter along and you continue kicking your can of debt down the road, I’ll wait for your call. Rethink bankruptcy as an option for getting out of debt quickly and cheaply. Think about this in terms of numbers. You want to legally satisfy your debt obligations. Wouldn’t you want the cheaper, better, faster way out of debt? The more quickly you eliminate debt, the more quickly you can accelerate savings and retirement. My philosophy is this: If it will take you more than 5 years to get out of debt, then you should consider filing bankruptcy. The chart below shows how long it will take to pay off just $30,000.00 with a nationally average interest rate of 15% and a monthly payment of $500.00. It will take 9 years to pay off that debt and you’ll have paid $55,797.00 to do it.
From the chart above, we can see that someone who files for a Chapter 13 debt repayment plan in bankruptcy can still repay 100% of what they owe. They can not only save over $25,000.00, they’ll have saved more than 4 years time too! Now, imagine the person who has completed their bankruptcy case and continued to save $500.00 during the remainder of time that the person in their own debt repayment plan outside bankrutpcy needed to finish his payoff plan. We get the chart below, assuming a 5% interest rate of return on their savings.
Now, it looks enticing, but what about your credit report? After all, you’ve worked so hard to build credit and you’ve heard that bankruptcy ruins your credit, right? For more information on rebuilding credit after bankruptcy, go here. Purely from a numbers standpoint, if you choose to take the road of actual full repayment, you’re essentially saying that your credit score is worth an investment, by you, of $25,000.00 and an extra 4 years. Looking at the time value of money, the same $500.00 saved over the time lost, assuming an interest earned at 5%, that 4 years cost you an additional $28,965.00. You mean to tell me that your credit score is worth more than $50,000.00!?? I bet that guy who filed bankruptcy and paid off his debts in full is glad he went that way, thanked his bankruptcy lawyer with a cup of coffee and now refers his friends to get out of debt faster because they see how happy he is and doesn’t need credit cards anymore because he has an emergency fund. *Protip: Your credit score does nothing more than tell the world how well you manage debt.
Life is nothing more than the sum of every decision/choice you ever made and those decisions that were made for you. You cannot change yesterday, but you can certainly impact your tomorrow by deciding how much time you are willing to invest and how much money you are willing to pay to eliminate your debt once and for all time. Then, what’s your next plan? If 4 years equals $28,000.00, would you reconsider your strategy for getting out of debt? If your friend asked you for advice, would you share this information with them?