Let me fill you in on a not-so-little secret: I am appalled that potential bankruptcy clients are often deterred from filing due to the fear of judgement from others. This may be a soapbox of mine, but I believe it is important to stress the idea that filing for bankruptcy is often a prudent financial decision that can greatly improve the quality of a debtor’s life.
In an attempt to clarify certain preconceived notions about those filing for bankruptcy protection, I thought I would share a snapshot of a recent chapter 13 client (with their permission, of course). This family suffered a one-two punch, first suffering through a failing housing market and then struggling with stagnant employment opportunities. Obviously, names and other identifying features have been changed to protect the debtors.
Ages: 38 and 34
Professions: John – Senior Account Executive; Jane – Registered Nurse
Location: Desert Ridge, Phoenix
Yearly Income Combined: $130,000 Gross
Net Monthly Income (After Taxes): $8,200
Children: 3 (Ages 8, 6 and 3)
Automobiles: Mercedes E350 Sedan ($599/33 month Lease), Ford Fusion (Purchased $32,500). Combined Monthly Payment (lease, Loan, Gas, Repairs) of $1850.
Home Purchase: 4 Bedroom/3 Bath, Bought Late 2005 for $475,000. Monthly Payment of $3000.
Combined Credit Card Debt: $25,000. Monthly Payment of $500.
Student Loan Debt: Combined Monthly Payment of $700
Monthly Household Grocery Budget: $700
Monthly Household Gas Budget: $350
With the above budget, John and Jane had $1,100 remaining at the end of each month as disposable income. However, you must keep in mind that the above expenses are really only a rough outline of what they actually paid. While they received generous health benefits from John’s employer, the cost of raising three kids what more than they anticipated.
In late 2008, John’s company downsized and, while he did not lose his job, his benefits and yearly bonus was all but eliminated. This effectively decreased their combined monthly income to $7600 and forced them to seek health benefits from a third-party provider, adding an additional $289 monthly payment. In addition, Jane’s ageing mother decided to relocate to a retirement community across the valley. This left John and Jane without childcare. They had to arrange for alternate care, at a monthly cost of $675. John and Jane’s ending monthly budget fell to $-664.
In an attempt to prioritize the monthly bills, John and Jane skipped several credit card and student loan payments. Within only a few months, this created a past-due balance and additional late fees that totaled over $5000. When the creditors started calling, John and Jane learned to unplug their phone at night. They continued this way, borrowing against their savings and prioritizing bills, for the duration of 2009.
The second blow came in 2010, when the time came to re-finance their home. See, when they purchased the home several years prior, they chose a 5-year fixed-rate mortgage. It offered a low teaser rate and required only a 5% down payment. Unfortunately, this time around their home appraised for only a fraction of the initial purchase price: $315,000.
When they came to my office, John and Jane had maxed out their credit cards, spent down their retirement and college savings accounts, and were at risk of losing their home and two cars. With three young children to provide for, John and Jane showed signs of extreme stress and anxiety. Their financial difficulties had quickly taken priority in their household.
Without writing a novel, let me just say that things are looking up for John and Jane. They have eliminated many of their burdensome debts and have settled into a comfortable monthly budget. In addition, they will readily tell you that filing for bankruptcy protection was the best decision they ever made.
The point I wanted to make with this story is that bad breaks happen every day. This family was not financial irresponsible, there was no gambling addiction or excessive spending. Instead, there was simply a string of bad breaks. Perhaps in hindsight it could have been prevented, but I see no reason to fault them. Certainly, there is no room for judgement. I have said it once, and I will again: filing for bankruptcy protection is a prudent financial decision that is best made without embarrassment or fear of judgment.