Bankruptcy is a Financial Decision, not a Moral One

People frequently grapple with a pang of moral guilt about filing for bankruptcy protection. They shouldn't. In years past, there may have been a moral dimension to filing for bankruptcy. Today, filing for bankruptcy -- whether a Chapter 7 discharge, or a Chapter 13 repayment plan -- represents a new normal in the post-financial meltdown world.

The right to file for bankruptcy protection is found in the United States Constitution, in our laws, and is one of the things that makes our country great. The ability to discharge debt is one of the things that encourages and allows the entrepreneurial spirit to thrive in the United States. A small business owner can take a risk, and if it doesn't work out, we don't send people to debtors' prison, or hang the debt around their neck for the rest of their life.

There is a significant amount of misinformation and disinformation about people who file for bankruptcy. The notion that people intentionally run up credit card balances and then discharge the debt is just false. Rather, the majority of people who file bankruptcy are just regular people who are doing their best to work hard, pay their bills, and make ends meet. Often times, these people are just treading water when they are hit by an unforeseeable surprise such as illness, divorce, or unemployment.

Filing bankruptcy is not a moral decision. It is a financial one. Just like saving for retirement or making a household budget. In general terms, a useful way to consider whether bankruptcy is right for you is to make an honest assessment about what your debt will be two years from now. If you realistically believe you can pay off all of your debt within two years, that is a good option. On the other hand, if you are going to be just as far in debt (or more) as you are now two years from now, then bankruptcy may be the right option for you.

And you are not alone! In the years since the Great Recession, millions of Americans have hit the reset button on their debt and started their lives over again. The United States Bankruptcy Courts have maintained bankruptcy statistics as required by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which bear this out:

  • During calendar year 2008, nearly 1.1 million bankruptcy petitions were filed by individuals with predominantly nonbusiness debt, an increase of 32 percent over the number of filings in calendar year 2007.
  • During calendar year 2009, nearly 1.4 million bankruptcy petitions were filed by individuals with predominantly nonbusiness debt, an increase of 32 percent over the number of filings in calendar year 2008.
  • During calendar year 2010, more than 1.5 million bankruptcy petitions were filed by indi-viduals with predominantly nonbusiness debt, an increase of 9 percent over the number of filings in calendar year 2009.
  • During calendar year 2011, 1.3 million bankruptcy petitions were filed by individuals with predominantly nonbusiness debt.


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| Michael Baxter

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