Myths and shame keep many from seeking bankruptcy protection

February 13, 2012, University of Arkansas
The bankruptcy process determines whether a debtor can pay all debts and still have enough money for the basic necessities for living. It is also an attempt to recover the productive capacity of the debtor.

( -- Two interesting facts that may counter modern ideas about bankruptcy: The overwhelming majority of U.S. filings belong to individuals rather than corporations or entities, and most of these people wait far too long to seek bankruptcy protection. These are two of many cultural misconceptions associated with bankruptcy in the United States, says Tim Tarvin, associate professor and supervising attorney in the student-staffed Federal Practice Clinic at the University of Arkansas School of Law.

“It’s very sad,” Tarvin says. “It's not unusual for people to break down in the interview setting with the student attorneys who are representing them. These families have been working so hard trying to figure out how to pay off their debt, and it’s just not working. The cash just doesn’t flow. The money isn’t there, and in most cases, it hasn’t been there for a long time.”

As evidence that people wait too long, Tarvin refers to statistics in The Two Income Trap, a book written by Harvard law professor Elizabeth Warren and published in 2003. According to  Warren half of all bankrupt families were unwilling to admit, even in an anonymous survey, that they had filed for bankruptcy. She went on to say that as many as 18 million households – compared to the 1.5 million that actually filed in 2003 – would have seen a significant improvement in their balance sheets if they were only willing to sign a bankruptcy petition.

Tarvin attributes this unwillingness to general about bankruptcy and one powerful deterrent: shame. This single trait sometimes forces people to go “underground,” meaning they work for cash only, purchase with cash only and then cannot borrow money for any reason or even open a bank account. This usually comes after there has been some kind of legal judgment against them.

“Very often and for whatever reason, there is tremendous shame,” Tarvin says. “For many of our clients, it’s against the tenets of their religion, despite Deuteronomy.”

When counseling clients struggling with these issues, Tarvin will invoke the Biblical passage, part of which states that “at the end of every seven-year period you shall have a relaxation of debts” and “every creditor shall relax his claim on what he has loaned his neighbor.” Because it was rooted in ancient Hebrew and Roman cultural traditions, which valued the recovery of productive capacity of the debtor rather than punishment, despite the creditor’s loss, this passage provides Tarvin with a historical context for explaining the real purpose of bankruptcy.

The real purpose then, according to Tarvin, is not to shame the debtor but rather to simply determine whether he or she can pay. It is a process designed to determine whether the debtor can pay all debts and still have enough money for the basic necessities for living.

“To blame bankruptcy for the debtor’s insolvency and non-payment to the creditor is like blaming the coroner for the death,” Tarvin says. “He – the coroner – is simply pronouncing that the person is deceased. Likewise, a bankruptcy discharge issued by the judge is merely a determination that the debtor is financially unable to pay his debts.”

As Tarvin alluded to above, clients who come into the federal clinic represent a demographic that destroys two other myths that Warren addresses, the myth of the immoral debtor and the over-consumption myth. Warren found that 87 percent of families with children cite only three reasons for bankruptcy: job loss, family breakup and medical problems. Bad investment and credit card overspending are included with “all other reasons” within the remaining 13 percent. Tarvin admits that some clients who come into the federal clinic have reached a financial condition that necessitates because they were irresponsible with credit cards, but these people are a minority.

By far, individuals rather than businesses file the greater number of bankruptcies in federal courts each year. In 2010 there were nearly 1.6 million total filings. Only 3.5 percent of these were business filings.

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1 / 5 (3) Feb 13, 2012
This is nothing more than a paid advertisement by lawyers to gain more business through bankruptcy hearings. Lawyers should feel shame, if they were human, from advertising in such a way!
1 / 5 (1) Feb 13, 2012
I suspect that there are two main reasons why a person can get over indebted: creditors being forced by laws to lend to people who are unlikely to be able to repay and creditors loaning to people they know are unlikely to be able to pay so that they will continuously pay enough interest to be a source of resources--like a cow or sheep confined to a farm for it's productive capacity. Both are immoral.

A borrower does have a responsibility to not knowingly over borrow but so too does a creditor have a responsibility to not destroy people's "productive capacity" and usually it is creditors who have the information and experience to know whether a loan is fair or a sucker's bet for the borrower. A government has a responsibility to not mandate loans which are likely to bankrupt the borrower and leave creditors holding the bag and creditors deserve to take a bit of a haircut if they lend to people with the intent of making them into livestock.
1 / 5 (1) Feb 13, 2012
It is not uncommon here in Canada for a young person to be turned down by a local branch for a credit card because they have too little income (eg student loan recipients) and likely couldn't afford the payments that someone who is inexperienced with credit and has little income is likely to incur while the head office will call them up and offer them a credit card. The difference is that the local banker understands that creating situations where people are overburdened with debt is bad for the local economy and likely to decrease the market for other banking services like mortgages and car loans and business loans. The head office doesn't care and just wants more sheep to fleece.
1 / 5 (1) Feb 13, 2012
Sean, it is every person's responsibility when taking a loan; not the governments. Your rationale does make sense for you b/c your country has voted a nanny state for themselves. We're still trying to fight to keep ours from turning into something that resembles yours. Hopefully we don't fail. If we do, we'll be conducting these discussions in another language in a generation or so. Cheers from you big brother to the South!
1 / 5 (1) Feb 13, 2012
In the US, small business operating loans that have been open for years are being terminated by federal bank regulators.
The FED is running the banks, not the bankers.
3 / 5 (2) Feb 13, 2012
Attaching a stigma to failure is a good thing. Rewarding failure propagates failure. When one signs a note, one gives one's WORD that he or she will pay the obligation. All a man really has in this life is his word. That is unless he or she is a politician and then lying is a matter of course. It is still not acceptable. Bankruptcy should be difficult and uncomfortable.
not rated yet Feb 13, 2012
People cannot keep the pile of money intact. If they're allowed to do it, they'll attempt to steal it - such behavior is in their very nature. The government will attempt for the very same with inflation. The only solution is not to pile the money - it will make the economy stable. We aren't required to give our money to the bankers and government willingly. If someone needs to pile up capital, he should ask the people for money. The problem of economy is, it's pumped with free money, but without real value. Currently the global war is the only way of natural healing and demonetization of economy.
1 / 5 (1) Feb 13, 2012
People value what they pay for, either with earned wealth or hard work, not 'free money'.

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