Bankruptcy

A Fresh Start is a State of Mind Too

By Wendell Sherk, Missouri Attorney

Bankruptcy is about fresh starts.  The law gives you a discharge of many debts which is what we call a “fresh start.”  But actually getting your money’s worth out of it is as much about what you do and how you approach this new chance as it is about the law and finance.

Now, I’m not going to sell you on a New Age “see your fresh start through your Third Eye” philosophy.  If that motivates you, that’s fine.  What I’m concerned with are the every day outlooks of folks who seek help.

For example, one of most common questions we are asked is a variation of “How will bankruptcy hurt my credit?”  or “When can I get credit again?”  There is a good reason to worry about this — and a not so good one.  You need credit to make large purchases, particularly long-term assets like houses and cars.  In those cases, you are borrowing from your own future to buy something which presumably will last a long time and would take an unreasonably long time to save for otherwise.  And you may need credit for business in various ways, borrowing money to make more.   Those are fair concerns — and it’s usually possible to re-establish credit for these purposes.

But deep down, there’s another reason many people want to know when they can get credit again — they have trouble imagining a world without it. Credit has become so core to their lifestyle that going without it is like going without electricity.  Possible only in theory.  The typical way this is phrased is, “I need a credit card for emergencies…”  This can be true.  But in reality it often means folks have not found a way to live within their means enough to build up an emergency fund in savings.  So credit is their emergency fund.

This way of looking at the world pushes you too close to the edge.  It means that only a few surprises — hours lost at work, insurance costs go up, an auto accident — will push you back into the cycle of borrowing for immediate expenses — “consumption,” as economists describe it — without having a way to pay it off.  And then looking for a cheaper source of borrowing to deal with that debt.  And so on.

Many people are so close to the edge with a minimal lifestyle already and in such cases they can’t be blamed for using credit when they genuinely need it.  Survival comes first of course.  And others complete bankruptcy with debt they could not eliminate, like large student loans or taxes, so Congress has seen fit to limit their fresh start.

But for most people completing bankruptcy successfully, they have an opportunity to start over.  Bringing the same mindset to this new life that got you into trouble in the first place is a good way to throw away your chance at financial freedom.  One of the greatest things about the fresh start is the freedom it gives you to live your life for yourself and your family — and to stop working every day for your creditors.  So if someone offers you the opportunity to get credit to “enhance” your lifestyle, they’re trying to steal your future.  Just say no.

Full post as published by Bankruptcy Law Network on January 20, 2010 (boomark / email).