5 money and credit lessons from people who went bankrupt
Among their tips: Always save money, and treat credit cards like cash
Consumer finance expert, author and “Opening Credits” columnist.
Bankruptcy is often perceived as a symbol of failure. However, those who have had to file for bankruptcy said it presented an opportunity to learn and recalibrate.
In a January 2016 ConsumerCredit.com poll about attitudes toward bankruptcy, 47 percent of respondents said they would feel ashamed if they had to file, and 21 percent would feel guilty.
Whether a person liquidates consumer debt with a Chapter 7, satisfies balances partially and incrementally with a Chapter 13 or reorganizes business liabilities with a Chapter 11, the benefits of these laws can extend far past payment relief. For bankruptcy filers, it’s a chance to tap into their strength and become educated about credit and money so they never have to go through the process again.
5 money, credit lessons learned from bankruptcy
- Save money, no matter what.
- Reduce and monitor spending.
- Treat credit cards like cash.
- Consider bankruptcy a business decision.
- Know you can fall and get back up again.
1. Save money, no matter what.
Omar Spahi, founder of Ocean Avenue Realty in Santa Monica, California, has been featured on the hit Bravo reality show “Million Dollar Listing: New York.” His start was auspicious, having inherited a trove of properties. Saving for the future didn’t seem necessary. Then the housing bubble burst, and Spahi was left carrying loans on properties he couldn’t unload.
“I just could not maintain the cash flow,” he says. “Sales that were supposed to go through never happened. We (my dad was advising me) were underwater, and couldn’t pay the mortgages. We asked for a loan modification, but the bank said no. Our backs were against the wall, so we decided to file for Chapter 11 bankruptcy.”
Spahi was 21. Looking back, he says his biggest mistake was not putting money aside for financial emergencies when he had the means to do so.
Because of the bankruptcy, “I learned to save in the good times for the down times,” says Spahi. “You have to plan ahead. It’s hard, but once you do it for a while, it’s not. I move money over from checking into savings no matter what. I don’t touch it. I save the same amount every month or increase it over time.”
Spahi keeps his savings in a different bank so he won’t be tempted to spend those funds.
2. Reduce and monitor spending.
Cindy Mich, founder of the Milwaukee-based Art is Alive Film Festival, declared bankruptcy 15 years ago, discharging a combination of medical bills, credit card debt and personal loans.
“In the beginning, after the bankruptcy, it was a rebirth of sorts,” says Mich. “I thought, ‘Oh, I should get another credit card,’ but I didn’t. I looked at what I was spending my money on and how I could do without. I took it as a lesson. You have to ask yourself how you get yourself into that position in the first place.”
She then began to adjust the way she used her income.
“I started always checking my receipts, because the little charges add up,” says Mich, “You have to check and double-check to make sure you’re not overcharged. I’m much more careful about how much I spend on myself. My kids come first. I cut expenses, consolidated rent (I had someone move in to my home), I didn’t take on a car payment and bought a piece of junk instead. I watch gas prices and look for places to buy cheaper food.”
Talking to other people about how they manage money was also instrumental in understanding how to downsize.
Mich says the bankruptcy taught her how to keep herself comfortable while also within budget.
“At the end of the day, most people feel bad about bankruptcy,” she says. “I’m not proud of it, but it helped me. It teaches lessons. It all comes down to learning those lessons and making sure you do everything you can so that it doesn’t become a repeat performance.”
3. Treat credit cards like cash.
Tamara Hartley, from Columbus, Ohio, filed for Chapter 7 bankruptcy before she even knew about the process or its long-term ramifications.
“Someone told me about it and suggested I do it,” says Hartley “I had racked up quite a bit of debt and was dodging bill collectors. I just wanted some reprieve. I got my first credit card on my college campus and had no idea how to manage or leverage credit.”
Soon Hartley opened as many cards as she could from all her favorite stores.
“Everything was good until I had to start paying them back!” she says. “I was only paying the minimum balances and still racking up charges. I got myself into a huge mess. My credit card debt caused me to fall behind in other areas, and I was overwhelmed.”
Going through the bankruptcy process, though, taught her how to charge intelligently.
“The greatest lesson I learned is that you actually have to pay your credit cards,” says Hartley. “I learned to use credit as cash, only using what I knew I could pay off within the month to avoid finance charges and to stay current with my bills.”
4. Consider bankruptcy a business decision.
As the Get Out of Debt Guy famous for helping people find ways to pay their bills, Steve Rhode, seems an unlikely candidate for someone who once filed for bankruptcy protection. Yet before going pro as a financial adviser in Raleigh, North Carolina, he made some bad decisions and ended up in overwhelming credit card debt.
“I was putting business expenses on my American Express card, hoping sales would come through so I could pay it off,” says Rhode, who was relying on one particularly large transaction to save the day.
“Once it didn’t, it was like dominoes and everything fell,” says Rhode. “I called everyone I knew for money help, and they couldn’t. I called my credit card companies to see what they would do, but I got nothing.”
In the end, Rhode filed for Chapter 7 bankruptcy. “I felt like a total loser,” he says. “I was clinically depressed. The one day I said, ‘This is B.S. This is a feeling, but what is reality?’”
That question led Rhode to study behavioral economics and come to the realization that his reaction was far too emotional.
“What I learned was that bankruptcy is a legal process about numbers,” says Rhode. “We personalize it when we should take a step back and see it as a business decision. Just think, when American Airlines went bankrupt, their stock went up.”
Therefore, when examining your own financial affairs, be as stoic as the board of a large corporation. Once you remove guilt and other negative feelings from the equation, you can make the most rational choices.
5. Know you can fall down and get back up.
When Damon Day, from Colorado Springs, Colorado, was a business consultant, he took on excess real estate obligations.
“The housing market was going gangbusters, so I decided to have a custom house built,” says Day. “It had $400,000 in equity immediately. Then I got an idea to buy more land, and for my brother-in-law to build more houses so we could sell them. But honestly, I didn’t know what I was doing.”
Day quickly found himself saddled with a large amount of unaffordable, unsellable property.
“I paid $800,000 for my first house and when the market crashed, it was appraising at $350,000.”
Day gave it back to the bank and moved his family into a fifth-wheel RV, which he parked in his brother-in-law’s driveway. He was, essentially, homeless. Still, Day attempted to keep his finances from falling further by turning his niece’s room into a temporary office and working nonstop.
“I struggled to pay all the lenders, but I couldn’t dig myself out of the hole,” he says. He eventually filed for Chapter 7 bankruptcy. “It took years to decide because, ‘oh my gosh I can’t file, who will ever hire me? I’ll be ruined!’ was going through my head.”
After the discharge, he was able to turn around his financial life. Day’s overarching message is to be resilient. If you get in debt trouble, try hard to pay your bills, give it your best shot. If you can’t make it work after that, you can declare bankruptcy and work your way back up.
Day is now a debt relief expert who helps others make wise decisions about their money and debt.
“Lots of people don’t want to file when they have no other options because they think it’s a moral obligation to pay what you owe,” Day says. “So, I say, ‘You’re in luck. You can file and be legally absolved, but there’s no law to prevent you from cutting your creditors a check later, when you’re in a better position.’”
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