McLeod Law Offices

I was recently talking with… I guess I could refer to him as ‘an entrepreneur.’  He was a former mortgage broker who found himself down on his luck after the real estate market tanked.  Among the things he said to me was that he did not like bankruptcy at all.  I asked him if he filed bankruptcy and had a bad experience with it – and he said no on both counts.

“So then what do you base your feelings about bankruptcy on?” I asked.

“Well, it kills your credit score, and I just don’t like it” he replied.

Initially, I thought it was an odd response.  Now that I’ve had a few weeks to kick it around in my head, I think it is more than odd – it’s very ill-informed.

If you are – or were – a mortgage broker, you cannot get someone a mortgage if they have bad credit.  At least not nowadays.  We are in the middle of a credit crunch – and no one is getting new lines of credit unless they have among other things, a good credit history… some might suggest an almost perfect credit history.  If I am in a business where people having good credit is crucial to my staying in business, then I am likely to recommend that people do what I think they need to do to retain their good credit.  I might even suggest a short sale – or perhaps then new hip term: “strategic default.”

How bad is the credit hit?

By the time people come to my office, the credit score has already taken a beating.  They are – for all intents and purposes – at the end of what I coin as their “good credit cycle.”  They are over extended.  They have been late with payments.  They have made decisions that they regret, or decisions have been made that have affected them badly – like losing a job. When it comes down to it – people who seek bankruptcy protection are by and large, those who seek to wipe the slate clean….and by the time they have come to see me, they are either already in a credit mess, or standing on the precipice, staring into the abyss.

Sometimes though, they care current.  Their credit score is high.  But they see the handwriting on the wall, because they are bound by debt that is choking the core of their existence.

They are foregoing health care decisions – like prescriptions and anything else that might involve a co-pay or deductible.  They forgo the dentist and have learned to live with that achy pain in their mouth.  They barely see out of their glasses.  They are eating “beans and rice” or saltines and noodles because someone, somewhere put a bug in their head that it’s better to pay down debt at absurd interest rates, than simply admit they cannot take any more of the crap that being eye-balls deep in debt brings with it.

Until something that tells them enough is enough.

It’s something that tells them that they really have had enough of the collection calls.  They have had enough of the fear of having assets seized or property foreclosed on.  They have let go of the irrational fear that it’s a public record, that people will know or perhaps most importantly, that anyone will really care.  They have had enough of the lost nights sleep, the overwhelming anxiety, and the great feelings of vulnerability that being mired in debt can bring.

So it dawned on me – - the reason why this former mortgage broker told people he came into contact with that bankruptcy was bad option for them was because in his mind, people who file bankruptcy cannot become customers of his in a few years.  It seems to me that he is doing nothing more than trying to preserve a customer base for the future.

Are people better off following his line of thinking?  There’s no easy answer – because it depends on the person and their individual circumstances.  I certainly do not take the position that bankruptcy is bad for everyone, although readers here know that I take the position that bankruptcy is not something everyone in debt should be entertaining.

There’s also no easy answer because when it comes right down to it, we can only deal with what we know now. If you go through the archives here, you’ll see news reports that I’ve linked over the last four years where real estate groups and others with their own interests to protect have suggested that the housing market will bounce back by spring 2007, or maybe 2008, or perhaps 2009… and so on.  Hindsight tells us they were wrong… and I must now openly question whether this false (some might now even say perverse) sense of optimism has stalled our overall economic recovery, and delayed a much deserved fresh start for many Americans.

Our founding fathers gave Congress the exclusive power to enact bankruptcy laws.  Even then, they knew that economic cycles would bring times where a discharge of debts was necessary if for nothing else, to preserve the personal dignity of its citizens.  Bankruptcy is the societal safety net of what was and what will always be this great land.  No one is any authority on proclaiming it is universally bad.

And I question to what degree this country can move forward without first wiping the slate clean, especially when people are hell bent to scare folks away from bankruptcy …and ultimately, from the life that awaits them after the case is closed.

Related posts:

1. Clean Up
2. Can Declaring Bankruptcy Improve Your Credit Score?
3. The Price of Convenience
4. When Mortgage Brokers Request Secrecy

Tags: Bankruptcy, credit, Credit Report

This entry was posted on Friday, March 26th, 2010 at 6:11 pm and is filed under Bankruptcy, Chapter 7. You can follow any responses to this entry through the RSS 2.0 comment feed.
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