Why feel sorry for bankrupts?

[rugbyLEAGUEfan]

I've just been watching a story on Australians who have declared bankruptcy , and the essence of the story was this has helped these people get back on their feet .

The story used the phrase "People who have gone bankrupt through no fault of their own"

Now I believe that to go bankrupt one has to borrow . Whether it be credit cards , car loans , mortgages etc , I think I'm correct in saying that people don't declare bankruptcy over a late electricity bill.

I accept that wages have been relatively stagnant in recent years (decades?) and at least in Australia , the cost of living has surged . But interest rates certainly have been at all time lows since the GFC and don't look like going up to any significant level for a long time . I also accept that retrenchment is a significant contributer to bankruptcy levels . But really , in Australia , unemployment is less of an issue .

So....and I mean this genuinely.... Why should I feel sorry for bankrupts ? Why not the creditor ?Doesn't every bankrupt ultimately cost me , a saver , money ? Why is overcommitting to debt to obtain "stuff" and then having it taken away due cause for compassion ? Shouldn't people enter into debt with an eye to it being serviceable when costs / interest rates rise ? Shouldn't one ensure they can service the debt for a period if retrenched ?

I'm not here to bash people doing it tough . In fact , I hope to have my questions(opinions?)turned around . I want to be on the peoples side , not the banks .

 

[azzaman333]

You've been watching A Current Affair, haven't you?

I'm so sorry.

 

[rugbyLEAGUEfan]

You've been watching A Current Affair, haven't you?

I'm so sorry.

Yes (I promise I was on CFC and my flat mate had it on) , and thus am far more entitled to sympathy than a bankrupt . What a god awful show.

 

[mayor]

You've been watching A Current Affair, haven't you?

I'm so sorry.

I have no idea what kind of show it is... but this is response is hilarious



anyway: In general I agree with you Madviking. However, there are scenarios in which you can feel sorry for bankrupts.
For instance. Take a regular family of two parents and two kids. One of the parents is responsible for 80-90% of the income. This family has a nice house with a mortgage, nice car, kids sport and have some other hobbies but all within their means.
All of a sudden the parent that makes the most money has an accident/dies and can't provide anymore. The other parent hasn't got any real experience, lower education and won't be able to find a job to make as much money. Due to the kids being young, a full time job is also impossible.
They move to a cheaper house, different car etc. However due to the bad economy their old house wont sell and they have to pay for two houses with less money and eventually going bankrupt.

 

[Mise]

I think it's entirely possible to go bankrupt through no fault of your own. There may be things that the person could have done to avoid bankruptcy, but that doesn't mean that those failures caused the bankruptcy. The concept of causation is loose enough that you can reasonably argue both ways: that people who go bankrupt are always at fault, or that they are never at fault, or anything in between really.

 

[rugbyLEAGUEfan]

I think it's entirely possible to go bankrupt through no fault of your own. There may be things that the person could have done to avoid bankruptcy, but that doesn't mean that those failures caused the bankruptcy. The concept of causation is loose enough that you can reasonably argue both ways: that people who go bankrupt are always at fault, or that they are never at fault, or anything in between really.

I do see where you are coming from but I can't agree with "no fault". "Contributor to blame but also victim of circumstance" seems more likely . At some point a bankrupt needs to enter into an agreement whereby they make a loan of a significant amount . No loan , no bankruptcy , surely ?

I have been absolutely flat broke a number of times . When I finally managed to get out of the hole , I did not respond by making a significant overcommitment .

Bankruptcy cannot be thrust upon somebody unlike unemployment , bank insolvency , civil war , rampant inflation etc . I would consider financial ruin from these causes to be closer to "no fault" examples.

 

[Patroklos]

Circumstances matter, and we also need to remember that decisions made before a bankruptcy are not always made knowing a bankruptcy is going to happen.

However, there are some basic debt to income thresholds that can tell you if someone was on a sustainable road with a reasonable ability to absorb some unforeseen events. Its become common practice for many to stretch their resources to the very limit with the assumption that everything will work out for them, and the slightest push push will send them over the edge. This in generally describes the vast majority of home foreclosures in the US.

 

[classical_hero]

Yes (I promise I was on CFC and my flat mate had it on) , and thus am far more entitled to sympathy than a bankrupt . What a god awful show.

I think less of you now because of you admitting to watching such a show and for even listening to the advice.


Link to video.

 

[Mise]

I do see where you are coming from but I can't agree with "no fault". "Contributor to blame but also victim of circumstance" seems more likely . At some point a bankrupt needs to enter into an agreement whereby they make a loan of a significant amount . No loan , no bankruptcy , surely ?

I have been absolutely flat broke a number of times . When I finally managed to get out of the hole , I did not respond by making a significant overcommitment .

Bankruptcy cannot be thrust upon somebody unlike unemployment , bank insolvency , civil war , rampant inflation etc . I would consider financial ruin from these causes to be closer to "no fault" examples.

Well, take this simple example. A guy loses his job through no fault of his own, can't find a job, and, since he has no savings, goes bankrupt and loses his house. Sure, he could have saved more, or bought a cheaper house, bought unemployment insurance / PPI etc, got a more employable degree when he was at university, or taken some other actions that would have mitigated the ill effects of his redundancy, but ultimately, the redundancy was the cause. Those other actions that a more prudent person would have taken are things that mitigate the effect of a nasty event, but the nasty event is still the cause.

An analogy: If a pedestrian crosses the road while the green man is lit (i.e. he has done nothing wrong in crossing the road at that time), but a car ignores the traffic lights and runs over the pedestrian as he crosses, the car is the cause of the pedestrian's injuries. Sure, the pedestrian could have looked left and right before crossing and seen the car coming, but it's still the car's fault, not the pedestrian's. To me, looking left and right even though the crossing light is green is akin to taking out unemployment / payment protection insurance. I wouldn't say that the pedestrian was to blame for not looking both ways, nor would I say that the unemployed man was to blame for not taking the mitigating actions I talked about earlier.

 

[rugbyLEAGUEfan]

An analogy: If a pedestrian crosses the road while the green man is lit (i.e. he has done nothing wrong in crossing the road at that time), but a car ignores the traffic lights and runs over the pedestrian as he crosses, the car is the cause of the pedestrian's injuries. Sure, the pedestrian could have looked left and right before crossing and seen the car coming, but it's still the car's fault, not the pedestrian's. To me, looking left and right even though the crossing light is green is akin to taking out unemployment / payment protection insurance. I wouldn't say that the pedestrian was to blame for not looking both ways, nor would I say that the unemployed man was to blame for not taking the mitigating actions I talked about earlier.

Mise the mailman , always delivers . Bastard banks

 

[brennan]

Loans are a mutually agreed and contracted financial transaction, the lender assesses and accepts the risk of default but considers this to be outweighed by the potential financial gain. If a loan is defaulted on and a bankruptcy is declared neither party is legally at fault and there is no need to allocate any responsibility.

Bear in mind also that almost every business startup these days takes out loans and a large proportion of them fail in the first few years. Bankruptcy is pretty normal and not a big deal at all.

I was discussing the possibility of bankruptcy with a client a few months ago. He couldn't declare himself bankrupt as there is a fee for this in the UK - which of course he could not afford.

 

[rugbyLEAGUEfan]

Loans are a mutually agreed and contracted financial transaction, the lender assesses and accepts the risk of default but considers this to be outweighed by the potential financial gain. If a loan is defaulted on and a bankruptcy is declared neither party is legally at fault and there is no need to allocate any responsibility.

Very interesting . But couldn't it be argued that if the loan is made and subsequently repaid there is a benefit to both parties . If it is not , the creditor is the sole party disadvantaged ? (I'm not considering the hardship of the borrower , simply the dynamics of the transaction) . Once the loan is made there seems to be no further obligation on the lender , the lender has fulfilled it's part of the agreement . The non-repayment and subsequent ability to declare bankruptcy seems weighted in favor of the borrower.

 

[Leoreth]

You should also note that the probability of a default is already priced in in form of interest rates.

 

[Cutlass]

I do see where you are coming from but I can't agree with "no fault". "Contributor to blame but also victim of circumstance" seems more likely . At some point a bankrupt needs to enter into an agreement whereby they make a loan of a significant amount . No loan , no bankruptcy , surely ?

I have been absolutely flat broke a number of times . When I finally managed to get out of the hole , I did not respond by making a significant overcommitment .

Bankruptcy cannot be thrust upon somebody unlike unemployment , bank insolvency , civil war , rampant inflation etc . I would consider financial ruin from these causes to be closer to "no fault" examples.

3/4 of a million Americans are forced into bankruptcy every year by health care costs that they cannot afford to pay. And these are people with assets and insurance, just not enough for a critical injury or illness.

Before you think too badly about bankruptcy, consider the alternative. The harsh treatment of debtors has been horrendous over the centuries. But lenient treatment is actually a positive for the economy and society.

http://www.ihatedebt.com/ALookatDebt/TheHistoryofDebtinAmerica/

http://www.livescience.com/3629-history-bankruptcy-dungeons-slavery-executions.html

http://www.bsos.umd.edu/gvpt/lpbr/subpages/reviews/skeel0506.htm

 

[rugbyLEAGUEfan]

3/4 of a million Americans are forced into bankruptcy every year by health care costs that they cannot afford to pay. And these are people with assets and insurance, just not enough for a critical injury or illness.

I was not aware of this . My premise that bankruptcy by definition involves borrowing is clearly not the case . Wow America ! How can you let this happen ?

In regards to whether I believe harsh treatment of bankrupts is appropriate . I don't . I'm more questioning the idea that ease of bankruptcy , if indeed it is easy , is as victimless as the story implied.

 

[Borachio]

The original OP is an interesting question.

At first sight, getting into debt seems a bit of a no brainer. Budgeting, after all, is only a matter of arithmetic; and not very difficult arithmetic at that.

Mr Micawber:

Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness.
Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

However, a very good friend of mine managed to get herself in severe financial difficulties simply through an inability to budget effectively, without any malice aforethought whatsoever. It is my view that the bank bore a great deal of responsibility for this.

Freely available credit to finance consumption seems to be inappropriate.

For myself, I have never felt the need of it, and in fact I would resent paying more for a product (because of interest payments) due to my impatience to have it.

Of course, mortgaging the purchase of a house is somewhat different. To begin with it is a secured loan, and the comparatively large value means that deferring its purchase is usually impractical for most people.

It is, though, still possible to get into financial difficulties with this:

Given a slump in prices following a boom, it is not infrequent for people to find themselves with negative equity, i.e. the value of the property is less than the amount borrowed. So that selling up (if possible) will not clear the debt.

If on top of that, a person finds themselves suddenly redundant, and unable to continue with the mortgage payments - even with rescheduling and the like - then I can see no other resort than bankruptcy.

Of course, one may legitimately say that everyone should take responsibility for themselves. But in practice not everyone is capable of it.

Indeed, this raises the whole issue of human beings as social animals and to what extent any of us is individually responsible (e.g. could you survive - for long - solely by your own efforts?); an in-depth discussion of which is probably beyond the suggested scope of this thread.

 

[Bamspeedy]

In the US, there was a change in the bankruptcy rules in 2006, resulting in a large surge of bankruptcy filings just before the change.

Prior to this change you could file bankruptcy and start over with no debt and seldomly have to give up any assets. Now as far as I understand not all of those debts will be erased or you can get them refinanced (at a very low interest rate or interest free?), or it's harder to qualify for bankruptcy or something like that, I'm not sure of the details just that the rules are harder now than pre-2006.

Sure, because of health expenses one may feel sorry for someone in bankruptcy, but what if it's because they didn't have 10k for the health procedure because they spent 30k on a motorcyle, a boat and trips to disneyland, etc.

 

[brennan]

But couldn't it be argued that if the loan is made and subsequently repaid there is a benefit to both parties . If it is not , the creditor is the sole party disadvantaged ?

Conversely, if a loan is entirely repaid then the creditor has found the arragement purely profitable with little or no input of effort, whereas the debtor - having worked hard to use the loan to improve his circumstances - is out of pocket to the tune of any interest paid. Both parties have to weigh up the costs and the benefits.

Historically, treatment of debtors and bankrupts was appalling, we use the current system because it does not unduly penalise those who are prepared to take reasonable risks. Permitting entrepreneurs to fail and giving them a chance to try again is on the whole more advantageous for society (and more profitable) than condemning them all to the workhouse the first time they make a mistake.

However, a very good friend of mine managed to get herself in severe financial difficulties simply through an inability to budget effectively, without any malice aforethought whatsoever.

The idea that all one need to do is budget properly is flawed. Even Mr Micawber would have been in trouble if his income had suddenly halved.

Given a slump in prices following a boom, it is not infrequent for people to find themselves with negative equity, i.e. the value of the property is less than the amount borrowed. So that selling up (if possible) will not clear the debt.

Negative equity is not a debt issue, The amount to repay has not changed, merely the value of the asset you purchased. Since the property itself is the security the bank cannot repossess it and then claim you still owe them money.

Sure, because of health expenses one may feel sorry for someone in bankruptcy, but what if it's because they didn't have 10k for the health procedure because they spent 30k on a motorcyle, a boat and trips to disneyland, etc.

... and what if they never had £1000 spare in their life? They should just rot in the gutter? What about the people who take out health insurance and it just doesn't pay for their medical needs?

 

[rugbyLEAGUEfan]

Sure, because of health expenses one may feel sorry for someone in bankruptcy, but what if it's because they didn't have 10k for the health procedure because they spent 30k on a motorcyle, a boat and trips to disneyland, etc.

2 reasons

1. In a country as wealthy as the US , it doesn't seem right that if someone can save $10,000 they should have to save it up for health care (assumption being that someone with $10,000 has paid a fair whack in taxes)

2. Motorbikes and Disneyland rock . (boats less so)

 

[timtofly]

From my experiences, in the US, Families may go for five years, paying only the interest, and never getting the principle down. The goal is to make the full 30 years, but when the unexpected happens like, illness, cost of living changes, there is no way to keep up, thus bankruptcy. The creditor has already been getting the money all along for 5+ years.

Most of the debt is unsecured, that is a wash, and by now has been paid a couple times over in interest. The secured portion like a house, and sometimes there is a balloon payment that wipes out any available resources unmercifully, has no value against the rest of the mortgage. One usually has to walk away and attempt to start over again.

I do not think that the banks are being hit that bad, and if the party doing the bankruptcy has substantial income, they are still paying off creditors during the bankruptcy. The biggest issue here in the US in the last 10 years has been banks writing loans that they know will be defaulted on, but they do so anyways for "sake" of the economy.