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You have just graduated from a good university with a law degree and a student debt of $100,000. Twenty-five percent (25%) of your debt is a government student loan, whole the remainder is comprised of various private loans and a line of credit. You have no assets aside from your personal effects and small emergency savings. While it will climb quickly, your starting salary in your chosen field is $30,000.
Money is tight and keeping up with your debt payments ties up most of your income. You tell your friend Billy about your plight. “It sucks!” you say, slurping your ramen. “I got a good education and did everything right, but I’m bogged down in debt payments while my friends who barely made it through high school have more disposable income and are living better than I am. What gives?”
Billy shrugs and says “Well, you could always move to the big city to make more money and pay down your debt. Or you could declare bankruptcy and be home free!”
- If you decide to suck it up and devote yourself to repaying your debt, turn to page 13.
- If you decide to sell your soul, move to Toronto and take a high paying position as a corporate lawyer, turn to page 22.
- If you decide to declare bankruptcy, turn to page 25.
———–
“No, I’m just going to suck it up,” you reply. “It might take a few years to pay off my debt, but I can do this!”
Seven years later, you finally pay off the last of your student debt. “Whew!” you say as you make your last payment, “That feels good! Now, to start saving for retirement!”
———–
“You’re right!” you exclaim, jumping up from the table and spilling your noodles. “If I can make it there, I can make it anywhere!”
While the money is good, the long hours of soul-destroying work quickly take their toll. Your fiancée leaves you for your plumber, and a few years later a senior partner finds you dead at your desk from a heart attack, debt free but still not finished your due diligence tasks.
———–
“You’re right!” you exclaim, pounding your fist on the table. “They should have never trusted me with money! I’m gonna declare bankruptcy tomorrow!”
Everything but your government student loans are discharged, and you soon have those remaining debts paid off as well. Without having to divert most of your income to student loan payments, you build a nice investment portfolio and live a comfortable life. You retire at 45 and think “Declaring bankruptcy was the best thing I could have done!”
* * *
This is pretty much the situation I found myself in a few years back when I graduated from law school. I did the responsible thing and have worked hard to pay down my debt, and it has worked well for me. But I still wonder occasionally- what if I had just declared bankruptcy? How would things be different?
I started thinking about this topic after Mr. ToughMoneyLove posted about the astronomical rise in bankruptcies filings in the US last year. I look at the amount of money I have paid down on my debt and can’t help but think that it would make a very, very nice investment portfolio or retirement savings fund. For that matter, if I had diverted it to mortgage payments we could be pretty close to having our house fully paid off right now. Sure, my credit would be screwed, but would that have impacted my standard of living and opportunities any more than a large student debt? Probably not. My job wouldn’t have been affected, my standard of living wouldn’t have changed in any noticeable way, the only difference would be a terrible credit score and a huge bump in my net worth.
I have done a bit of bankruptcy work for banks, and I’ve seen a number of bankruptcies from people in this same position, including new doctors, dentists, and lawyers. In these fields, starting salaries tend to be low and debts can be very high. While government student loans can’t be discharged in bankruptcy, these loans generally don’t even come close to covering the tuition fees for professional programs, let alone the other expenses associated with getting a degree, so the majority of loans are often with private institutions- and fully dischargeable.
So why didn’t I file for bankruptcy? Some days I think it’s because of mental instability. But the real reason is because of some rusty, worn out ethical compass that somehow managed to survive law school. I took on my debts knowing what the situation would be. It was a choice, and regardless of the wisdom of that choice, I made it freely. It would be wrong for me to walk away from those debts, no matter how easy or attractive doing so might be.
Have you contemplated bankruptcy? Do you think a discharge in bankruptcy should be more difficult to obtain?
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There is honor in fulfilling your personal obligations, including those in the financial world. There are lessons to be taught others from doing the honorable thing, including learning trust and responsibility. That should be your answer: “I took the honorable path.”
The other problem with declaring bankruptcy is that you could have trouble getting a mortgage. Paying off your house might not be possible if you can’t get a house in the first place!
@TML - I agree, it’s definitely the honourable thing to do. Based on the bankruptcy numbers, it appears that many people disagree with us on that one.
@Victoria - Thanks for your comment. Thankfully, our house and mortgage have been solely in my wife’s name- we bought the house a short while before we were married, and she could get better rates by herself (decent income, no debt) than with me at that time (low income, high debt).
But you are right- bankruptcy would (should?) making getting a mortgage a difficult proposition.
Your more practical consideration is that lawyers who declare bankruptcy in the past have restrictions over trust account access in most jurisdictions.
@ThickenMyWallet - Great point, and I had given that a bit of thought. It would also have potential implications for someone not yet called to the bar, as a bankruptcy could be a factor in the “good character” assessment.
If you’re working at a larger firm (or government) I don’t think the trust account issues would have much impact on you, although it could come back to haunt you if you ever made the move to a solo or smaller shop. And I’m sure most partners would look rather poorly on a bankruptcy when it comes time to hire associates or admit new partners…
This is a very interesting post Money Grubber!!
I am a fellow Newfoundlander and came across this site through reading MillionDollarJourney!
The topic of this post is near and dear to my heart.
I thought I would share my personal story as I can so much relate.
While not a lawyer I did graduate with a professional degree WITHOUT any student debt in 1997.
Up until last year I was always just shy of a 6 figure income earner (over 6 with my wife’s income).
While working my career I delved into a few personal businesses. While they did not necessarily fail, I pumped more money than I should have into them (mostly from credit cards). I also raised my standard of living way to fast by buying larger than necessary vehicles and home. Money was in and out of my hands in a matter of minutes. Very irresponsible.
Through a combination of credit card debt and loan consolidations my wife and I (we have two children) found ourselves about $100K in debt! It was miserable. We suffered through a very difficult couple of years trying to juggle things. Our household was very negative. It was not the foundation for positivity needless to say.
In August of 2006 I sat down with a friend from the past. He explained to me how he had just went through a bankruptcy. I listened intently without showing my cards (still have not to this day - I am surprised I am actually writing this!!). I asked him very strategic questions about how he kept his home and vechicle etc…
I left that conversation thinking “Gee Whizz, maybe there is some relief to this misery”
So, I set up a meeting with a Trustee.
My wife and I went to his office. While he was supposed to be acting on behalf of the companies (banks) for whom I owed money he was very helpful and comforting.
We decided on the spot to declare bankruptcy. That was August 2006.
We got to keep a vehicle because it was leased.
We could have kept both of them but we decided to give one of them up quite simply to allow us to get back to basics.
We got to keep our home quite simply because we never had enough equity in it anyway.
We left that meeting with a massive weight off our shoulder.
Our net worth was essentially zero that day.
I did have a lot of guilt. But, I slowly rationalized it. I thought about it a lot and realized that we live in Canada and the fact is that this is a country where the government sets up protection for its citizens. The banks are in the business of assuming risk. In exchange for the risk they get to take interest and charge us fees. They approved the loans!!!
They did not have to. They assumed the risk.
So… fast forward two years.
A little over a year ago I decided to make a career change. I took a business development role with a growing company. It worked out big time and today I am making $200K+ (combine that with my wife’s income and we are over $250K), we have invested very heavily in our RRSP’s, we have paid a nice chunk of change on our mortgage, we OWN our two vehicles (we paid cash - they were used). Two years after declaring bankruptcy our net worth is $213K and we owe not one cent besides our mortgage.
So… bankruptcy really worked in our favor. I believe we are picture perfect examples of how bankruptcy laws work in favor of the country. The country has gained in return a thriving tax generating family who is contributing greatly to the economy.
From a credit perspective it has not been as difficult as one might think. Perhaps a lot of success in this area has been the result of our incomes. About 3 months after declaring we applied for a “cash down” MasterCard from Capital One. I sent them a check for $1000 and they gave me a $1000 limit. Progressively since then they have increased our limit to the point today where it is $10K.
CIBC welcomed us with open arms and actually made us Imperial customers (probably because we are investing $3K+ per month). They are enticing us with Credit Cards and RRSP top up loans (we have not bitten to date).
Anyway, I thought I would share a success story with you.
To ease my guilt from a ‘pay back the money’ perspective I have been doing charity work. I figure that is the least I could do.
Take care.
Chris
Great post! Our family’s debt (not including our house) is greater than our annual combined income, and it has been tempting at times to declare bankruptcy. But so far, we’ve been able to pay all our monthly obligations on time, although sometimes just barely.
I don’t foresee declaring bankruptcy in the near future…but then again, I don’t know what the future holds. If my husband lost his job for any length of time, we’d be in a world of hurt! I might have to consider it if that were the case, but for the time being, we’re making it.
At least my kids have gotten a good lesson in NOT going into debt! Because of our situation, and their awareness that our own financial choices (i.e. instant gratification) has caused our current indebtedness (also read as “slavery”), they have such a bad taste in their mouths when credit card commercials come on tv. I really hope they never follow in our financial footsteps as a result!
Joy
http://happytobeathome.net
@Chris - Thanks for the detailed discussion of your experience with bankruptcy. It sounds like it certainly worked out well for you. Did you encounter much negative reaction (socially, family, creditors, banks) as a result of your bankruptcy?
@Joy - I’m glad to hear that at least your kids are learning valuable lessons from your experience. Keep hanging in there!