What follows is a bankruptcy memo written by a long-time friend and mentor, Don Reckseen, who is among many things, a bankruptcy attorney in Colorado. I have tremendous respect for him and his approach to bankruptcy, and with his permission, I’m sharing his perspective.
One of the areas I got the most from was bankruptcy. You can see people heave a sigh of relief—they are scared, frustrated, embarrassed and disillusioned all at once. Curing their debt problems is easy—any secretary can do it—but reinstating their morale, now that needs an expert. I got so good at this and got such satisfaction that I fidgeted waiting for the next BR client. (I quit before the new rules.)
Here is my bankruptcy speech: First, you need to understand that bankruptcy is not a declaration of defeat or failure like it was in your parents time (anytime before 1970). It is now a financial planning tool, and it is an effective one.
Next, there are two things about history you should understand.
1) When Columbus sailed, everyone thought he was “going over the edge”, so he could not find crews. But a faraway voice from the debtor’s prison wailed “I’ll go”. After reaching America, the men came ashore, found a big rock, and chiseled “In this country, you do not have to pay your debts” on it. This simple factor is the main reason why our economy developed in a unique (and it still is) way because it took the government out of private business. Until then, no one believed that private individuals could run an economy, but it not only worked, it exploded into an incredibly powerful economy. The new rule, however, having a huge effect on the economy, was largely ignored because there was very high social pressure for people to pay their bills. This pressure lasted until after WW II. Then, strange things began to happen.
2) Ford discovered that you could make more money by giving your workers more money. Sears discovered that you could make more money by not requiring your customers to pay. Your parents and grandparents preached: “Whatever you do son, protect your credit.” That advice was valid in the cash economy of the time, but the economy shifted dramatically to a credit economy, and that advice needs modificati9on. What your ancestors were talking about when they used the word “credit”, was “your good name and community reputation”. But soon, the credit economy changed everything*, and now, NO ONE has a good name or a community reputation. (Do any of your friends, associates or relatives pay all their bills in a timely fashion?? A) You don’t know, and B) You don’t care.)
*If $100,000 worth of groceries leaves the supermarket on Friday, the night deposit will be $10,000 or less. Today the word credit has a new meaning (ask Dad or Granddad if this is what they meant by “credit’.) “Credit” now means the ability to buy things you cannot afford. To the extent this is true, we should advise our children—“Do not get credit.” (This is Suzy Orman’s advice—she gets it.) This is the second historical development you should try to understand.
Finally, since you are so saddled with the “credit” brainwashing of your ancestors, take heart. Look at your creditors. They sold you things on credit or paid for things you wanted but could not afford.
That is their business.
On the day they did this, as businessmen, they knew just how many of their borrowers would file bankruptcy, and, just like Sears knows just what they will lose to shoplifting, they add this cost into their transaction with you.
Read your contract—it says: “I promise to pay $____ per month, unless I elect to file bankruptcy, in which case, you get zero. In return for your allowing me this option, I agree to pay 19 percent interest.” So, by filing bankruptcy, you are not “breaking a promise”, you are simply electing an option given to you by the creditor.
The simple new economic fact is that the lenders and sellers do not need to ever collect on the principal, so long as they are paid an extremely high interest rate. Sears built its tower with money borrowed from insurance companies that was secured by Sears customers accounts, and pays its Tower mortgage with interest collected from those same accounts. The principal is irrelevant.
DON’T FEEL BAD.
Become a one unit cash economy and you will be much happier than almost everyone—it is orange crate furniture until you save enough for a kitchen table, just like your granddad. Or participate in the credit economy, but not with vigor, and “don’t buy things you cannot afford.”
Amen, Don. I hope others gain relief from your perspective.