Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com.
Dear To Her Credit,
My
brother and his wife are filing for Chapter 7 bankruptcy. They went on a trip
to Australia for a week and then filed. They also plan on keeping one of their
credit cards (for gasoline) and want to keep their time share. When her mother
died, they received a large sum of money ($10,000) and a 2010 car. They have a
boat and three cars. They also have their brother-in-law living with them.
They
both work and have exhausted their credit cards. Their lawyer told them not to
pay any of their creditors, so they go to the casino!
What's
wrong with this picture? It seems they have everything and won't have to pay a
cent. They also own a house. -- Becky
Dear Becky, Most
Americans, like you, believe in paying their debts. You didn't describe your
own financial status, but if you're working hard, brown-bagging your lunches
and trying to pay your bills the old-fashioned way, it's irksome to see other
people flying by in late-model cars with seemingly not a care in the world.
I
firmly believe, however, that your financial future is likely to be brighter
than that of your free-spending brother and his wife. Here's why.
A
bankruptcy is a lot like a tracheotomy. When there's no other way to pay off monstrous
debts -- for example, when a business failure, lawsuit or divorce has left someone
with enormous debts and no hope of ever paying them back -- bankruptcy is a
financial life-saving procedure. The results can be quite satisfactory in those
circumstances. Free from overwhelming debt, the filer can recover and go on to
a productive life.
Unnecessary
bankruptcy, however, is like pulling out a penknife for a tracheotomy every
time someone has difficulty breathing. If the problem can be solved any other
way, I'd want to try that first!
I
don't know your brother, but I know a few people like him and his wife. A
$10,000 inheritance is nothing to them. It was probably spent before they got
the check. I've known people who have gone through much larger,
long-anticipated inheritances within months.
Their
expenses have to be huge. Gas, insurance and upkeep on a boat and three cars
are bad enough, and then there's the brother-in-law using utilities and
emptying the fridge. Running through all that credit and inheritance, they
became accustomed to an unrealistic lifestyle. They're going to have a hard
landing.
And
there will be a landing. They may think they can start the cycle all over again
after the bankruptcy, but their high-flying days are numbered. Sure, they can
get credit after bankruptcy. Some banks are more than willing to lend to people who can't escape debt by bankruptcy. That's because a bankruptcy reform law that went into effect in 2005 required that eight years must pass between Chapter 7 discharges of debt. But if they do get credit, the
limits will be low and the interest rates will be high.
The
big spenders may not keep as many of their toys as they think, either. It will
depend on exemption laws of the state they live in. The time share may be sold
to pay off creditors, which is just as well. They can't afford the time share
fees. Chances are, they won't have three cars when it's over, either.
Approximately
14 percent of bankruptcy filers will file again. My hunch is that those who
took their financial responsibilities lightly and learned nothing about living
within their means from the process will be first in line to file for
bankruptcy again -- and again.
Meanwhile,
don't let their wasteful ways get you down. It may not feel
like it when your brother and sister-in-law are traipsing around Australia, but
people tend to reap what they sow when it comes to money. Spendthrift ways do
not lead to a life of peace and financial success. Timeless values of thrift
and responsibility do.
Sally Herigstad answers questions about credit every week for CreditCards.com. Herigstad is a certified public accountant, author and speaker. She also writes regularly for MSN Money, Interest.com, Bankrate.com and RedPlum.com, and has been a guest on Martha Stewart radio and other programs. You can read more about personal finance and download free budgeting worksheets at her website: www.sallyherigstad.com
To Her Credit answers a question about a debt or credit issue from a CreditCards.com reader each week.
Send your question to Sally.
Published: September 16, 2011
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