Most people know very little about what bankruptcy really is. People from the “old school” may tend to view filing bankruptcy as a shameful act by those irresponsible who do not know how to manage their money. Or, even worse, an easy escape from debt they ran up intentionally and simply do not care to pay. But to the contrary, in reality, I find that my bankruptcy clients have often done almost everything possible to avoid bankruptcy–unfortunately sometimes to their own detriment.
As partner at Radix Law, most of my bankruptcy clients, including business owners, have tried their best in life and have done most things right. They have tried to manage their risks. They have tried to make responsible investment decisions. They have worked hard, become educated, grown businesses, saved money for retirement and have taken care of their health and their families. Some have been wildly successful but one thing no one has is a crystal ball.
Even the most successful businesses can fall flat in a struggling economy. People guarantee business debt because banks require them to, never thinking their carefully researched and well-structured business could fail. House and land values can plummet, like in the recent recession. People lose even the most seemingly secure high-paying jobs—even in a recovering economy. Those sorts of jobs can be the most difficult to replace. People get very sick and they also get divorced.
When things start to take a turn for the worst, most people wait longer than they should to consider bankruptcy options. For example, money saved in qualified retirement plans, like 401K accounts and IRAs, is protected in bankruptcy. Most people can keep their homes and their equity. Some (but not all) inheritances are also protected. But some people will go through their entire nest egg or sell their homes to avoid the perceived shame or stigma of bankruptcy, leaving them extremely financially vulnerable and emotionally spent.
So, while bankruptcy should remain something people should want to avoid, it is not always something they should avoid. It is intended to help honest, but unfortunate people who need a fresh start. Often that fresh start is a new business through which people can begin to contribute once again to the economy. Sometimes people or businesses reorganize their debt through a Chapter 13 or 11 because they just need a little breathing room. Considering bankruptcy is often the most responsible thing a person or a business can do.