Book Review: The Road Out of Debt
The Road Out of Debt: Bankruptcy and Other Solutions to Your Financial Problems by Joan N. Feeney and Theodore W. Connolly
You've read stories of people becoming debt-free. In personal-finance blogs, the stories are always ones of debt problems overcome through hard work and frugality. Sadly, in the real world, that doesn't always work. For reasons like illness, divorce, job loss, economic downturn, business failure, natural disaster, war — some debts entered into in good faith simply cannot be paid back. (See also: CitiMortgage Told Me to Default on My Loan)
Feeney and Connolly's new book is about how to find the dividing line between these cases, and what to do once you know which side you’re on.
The authors provide a good short course in money management much like you’d find in any personal finance book or blog — how to budget, how to cut expenses, and how to take control of your finances. Then the book starts talking about debt — mainly about the many, many ways to use debt unwisely. In particular, they’ve got a great chapter on the sort of debt that people with financial troubles turn to in a usually futile effort to stave off financial catastrophe for one more month — payday loans, car title loans, pawn shops, loan sharks, etc.
Even before that, they provide some basic advice on negotiating with your creditors. Especially in the world of finance as it is today, there are plenty of people who could actually fulfill their obligations — except that the creditors have written rules that let them lard up a debtor’s obligations with late fees and penalty interest rates. A knowledgeable debtor with good negotiating skills can often cut through those problems and get their obligations settled reasonably cheaply.
One bit in that section that I particularly like is on the psychology of debt collectors: Some will browbeat you, some will humiliate you, some will pretend to be your friend — but however they act, they’re all just trying to get as much money from you as possible. They don’t care what other debts you have or whether you can support your family. If you don’t understand this — if you allow yourself to imagine that the ones who act like friends are actually friendly — you’re going to be less successful in your negotiations. (I talk about the same psychological issues in my post Don’t Treat Businesses Like People.)
The authors provide some useful advice on seeking help (credit counselors and the like) if your financial problems are beyond what you can manage with those basic skills — and about avoiding the scams that often masquerade as help for people with debt troubles.
Sometimes, even with help, debt problems cannot be overcome. Specifically, if you can’t cover your minimum expenses plus interest on your debts and have money left over to pay down the principle on your debts, then you're over the line. Once you're in that situation, your financial situation can only get worse — your debt burden will rise every month, even if you don't borrow any more money.
When to Consider Bankruptcy
If you could support yourself — pay for your family’s shelter, food, and clothing — except that other obligations drain away more than all the rest of your money, then it’s time to consider bankruptcy.
Even if it’s time to consider bankruptcy, it may not be the best choice. Some obligations (child support, student loans) cannot be wiped out in bankruptcy. Alternatively, if you can’t even afford the necessities, then your household is not a viable economic unit and bankruptcy won’t help.
The core of the book is the information you need to figure whether bankruptcy is worth considering — and the information to consider it and make an informed decision.
Navigating the Rules
Bankruptcy is basically a bunch of rules for recognizing that some debts will never be paid back, and then sorting out how that situation will be dealt with. But because they're rules, it’s possible to break them — and get into kinds of trouble that ordinary people don’t need to worry about.
For example, it’s legal (although perhaps foolish) to borrow money even if you don’t know how you’re going to pay it back. But if you’ve already decided to declare bankruptcy and have no intention of paying the money back, it’s probably fraud. Normally you can choose to pay back some creditors (such as a relative who lent you money to keep the electricity turned on) before others (such as the credit card company). But once you've decided to declare bankruptcy, those decisions must be made according to the rules.
A big chunk of the book is about threading a path through those rules — protecting your ability to make a fresh start while making sure that you meet your obligations to the extent required by law.
A system of bankruptcy is a good thing. Some debts are never going to be paid back. A system that refuses to recognize that just drives economic activity underground (ruining lives in the process).
An Important Story
There's a reason why the story of overcoming debt problems through hard work and frugality is so compelling: The story models successful financial behavior. The behaviors that it takes to work through debt problems — spending less than you earn, taking control of your finances — are the same behaviors that lead to financial security in general.
That, I think, is why the story of bankruptcy is less compelling: It doesn’t serve as much of a model for households that aren't in debt. The skills — understanding an arcane area of law, filling out government forms correctly — don’t contribute much to an average person's life.
But that doesn’t make it an unimportant story. For those who are in trouble with debt, bankruptcy can free up the time and effort they’ve been spending trying to handle the demands of creditors and put that effort toward supporting their families.
Written by a bankruptcy judge and a bankruptcy lawyer, The Road Out of Debt does a good job of integrating these two stories in a way that illuminates the line between the sort of debt that can (and should be) worked through, and the sort of debt that will never be paid back.
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