Just over three years ago, I received a phone call from an old acquaintance who seemed extremely stressed out. This gentleman had previously been in sales and I had done business with him over 20 years ago. During our dealings we had discovered that we shared several mutual friends and over the years I had run into him several times on social occasions.
Now, he needed advice about some significant debt problems. His small business was failing and he owed tens of thousands of dollars to multiple creditors. After reviewing his paperwork I suggested that Chapter 7 would work and should be considered. My friend agreed but did not want to file because he felt very guilty about not paying back his debts.
For the next two and a half years, I would talk to my old friend on the phone about his debt problems. He was sued by several creditors but because he was unemployed there were no wages to garnish. He had no bank account so the judgments just sat there waiting for his financial situation to improve.
Finally, about two months ago, my friend called to say that he was ready to file. It turned out that he had a new job and his prospects were improving. I ran the means test numbers and….determined that he no longer qualified for Chapter 7 because he had too much disposable income.
My friend’s situation is, unfortunately, all too common. He did not want to file bankruptcy and avoided it successfully for over two years. His concerns were somewhat vaguely stated misgivings as opposed to a firm moral conviction. When his financial situation changed for the better, it was too late. Now, he is faced with the prospect of losing 25% of his take home pay to a wage garnishment and, given that he owes well over $200,000, he’ll be paying for a long time.
I would submit to you that my friend made a poor financial decision. I also do not think that he made a particularly good moral decision as he never articulated a thought out moral objection to filing bankruptcy (a fact he has acknowledged to me). From a purely business standpoint, my friend has subjected himself and his family to a great deal of hardship.
Everyone has heard of Donald Trump. A business tycoon, reality TV star and sometimes politician, the Donald has filed bankruptcy on corporate debt dozens of times over the past few years. Mr. Trump structured his business deals to avoid personal liability and I’m sure that the interest rates he paid on borrowed funds reflected that. I am equally certain that for every bad deal, Trump was successful on ten others and paid back his loans in full.
Trump recognizes that bankruptcy functions as a financial tool. The banks that loaned his corporations money also understood that not every deal works and that there is a risk of default. Banks are in the business of evaluating risk and charging fees and interest to reflect that risk.
When you are in financial distress you should make your decision about whether or not to file bankruptcy in the context of a business decision. When your creditor made the decision to loan you money that decision was based on business calculations and you should keep the transaction in this same arena. If you allow personal feelings of guilt to creep into your decision making you will almost certainly not make the best business decision for yourself.
As a bankruptcy attorney I help my clients evaluate their bankruptcy options as a good or not so good business choice. My friend allowed non-business considerations to influence his decision making and he will pay the consequences. Don’t you make the same mistake.