Failing to See the Big Picture

A lot of people come into to our office with preconceived notions of bankruptcy.  There is a sentiment that if a person fails to pay a debt, that it is a reflection of that person's character.  This perception stems from an antiquated view that the extension of credit by a bank or credit card company is an honor earned by the recipient by building their credit-worthiness.  In reality, the banks and credit card companies are not extending credit to you to reward your achievements in making payments on time.  They are extending credit to you to make money - pure and simple.  It's true, that the better your credit score, the better the terms of the credit will be that you receive.  But since the late 1970s, banks and credit card companies realized that in order to make the business profitable, they had to extend credit to a much larger audience in the hope that a certain percentage of card holders would not be able to pay off their balance and the cards would earn money off of interest.  In the 1980s and 90s, the banks began realizing the late fees were the real profit stream.  The companies began marketing to Americans by offering 0% introductory interest rates, luring customers to open a card and carry a balance.  Once the introductory rate expires, the companies begin profiting and if the card-holder misses a payment, the snowballing begins and the companies begin making real profit.  How do they know who to target? Credit scores.

The most extreme example of this was Providian.  Providian in the 1990s was targeting the riskiest consumers to make money off of late fees.  Providian experienced double-digit growth during the 1990s and at one point was making more than 50% of its profit from late fees - not from interest - from late fees.  This profitable business model caught the attention of the major credit card companies and they began following suit. In addition, the credit card companies began reducing the minimum monthly payment from 5% of the balance to 2% of the balance.  This was designed to lengthen the time you spend paying off your balance and increasing the time the credit card companies can charge interest (and lengthens the time that your family risks being hit with a financial emergency and the fine print terms are triggered).  To determine how long it will take you to pay off your balance, click here.

Of course, if you can continue to make your monthly payments and pay your monthly living expenses, then you are contractually bound to continue paying the debt.  However, circumstances do change - sometimes for the worse.  Most people are able to continue making their monthly payments as long as their employment and income are steady.  However, it only takes a reduction in hours or a temporary loss of employment to throw a family into a tailspin.  Once the high interest rates are triggered and late fees begin increasing the principle balances, the debt begins snowballing and unless the financial emergency is solved relatively soon, the minimum payments become overly-burdensome and the family is faced with the decision on what bills to let go late. 

This scenario is the most common trigger for bankruptcy filings.  Other common triggers are unforeseen medical expenses and divorce.  When you step back and look at the bigger picture, you realize that these triggers are all external factors.  The people who filed for bankruptcy protection were repaying their debts when they found themselves in difficult situations, no longer able to meet the obligations they could when they incurred the debts and could repay them.  Credit card agreements are contracts.  Loan agreements are contracts.  If your circumstances have changed since you made those agreements you would ask that the bank work with you to lower your payment or grant you a temporary forbearance.  Unfortunately, most lenders will not work with you when circumstances change.  

Bankruptcy is you using your legal rights to modify those agreements to cease future payments.  Businesses and even cities exercise their rights to such protection when cash flow prevents them from servicing their debts and continuing payment on necessary monthly expenses.  Once they've exercised their rights, they can begin getting back on their feet more quickly and efficiently. 

That is why bankruptcy is available to those who need it.  It serves as our economy's safety net.  It prevents citizens from becoming so over-burdened with debts that they cannot provide for themselves and their families - which in turn would put stress on the government to provide support to those people.  Bankruptcy allows people to prevent the further collection of their debt so that they can use their income for supporting their family - which in turn drives the economy.  In fact, bankruptcy is a constitutional provision (Article 1, Section 8, Clause 4). 

Unfortunately, many get distracted by the myths and stereotypes that prevent them from discussing their bankruptcy options with an attorney.  The shame is that many bankruptcy attorneys provide free consultations.  The person could have meet with a knowledgeable professional for insight into their situation and explored their options for resolving the debts, or at the very least to learn how to avoid making the problem worse.  

If you are struggling to make ends meet, call Mike for a free consultation at (763) 229-7538.  Know what your options are and make an educated decision. 

This content is not meant to constitute advice of any kind, including without limitation, legal advice of any kind. If you require advice in relation to any legal matter you should consult an appropriately qualified lawyer.

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