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Bankruptcy Stereotypes

February 10, 2020

When talking to people about solutions to debt problems we find there are many bankruptcy stereotypes most of them are simply not true and neither are many of the urban myths about bankruptcy

Bankrupts are not always poor they are not always uneducated, and they are rarely schemers or scammers.  Very few people plan to go bankrupt – at least not until they realize they have little choice, and by then it’s often too late to plan to obfuscate assets.  Bankrupts come from all walks of life, some of the more famous ones include such luminaries as Walt Disney, and of course the media as been rife with tales of Donald Trump filing bankruptcy – although it appears that is not true, some of Trumps corporations have filed strategic bankruptcies but not Trump himself.

Bankruptcy does not prevent people from getting credit again for seven years – that is an urban myth.  A first-time bankruptcy takes at least nine months to administer and will remain on a credit bureau report for 6 years after the bankrupt has been discharged.  In spite of the credit bureau report most folks find that they can start to re-establish credit almost immediately fooling their discharge.

A second, and each subsequent, bankruptcy stays on a credit bureau report for 14 years following discharge.  Given that some folks have been able to file five bankruptcies it is clear that the duration of credit bureau reporting did little or nothing to block their access to more debt (credit). Another stereotype is that poor and uneducated people are worse money managers, in fact the exact opposite is true – poorer people are accustomed to watching where every penny goes, more affluent people are far fickler and spend more frivolously.   There’s a perception that people who make more money have more assets, again that is rarely the case (unless their employer is holding pension or other investment assets) typically the portfolios often look very similar with adjustments for income levels.

One thing that most consumers, bankrupt or otherwise, share is a tremendous lack of awareness of just how costly using credit can be.  In many ways, using credit is like paying a (bank imposed) tax on every purchase.  The “tax” is sometimes income contingent – preferred bank clients have access to cheaper credit in exchange for depositing more money to the banks and using a wider array of credit products.  Nonetheless, the rate of interest has little to do with how much you will eventually pay for using credit, the length of time for making repayments is much more important.

I recently read an article on LinkedIn by an insolvency colleague in Australia who wrote that there restrictions on bankrupts leaving the country – Canada does not, generally, impose such restrictions.  There are of course many videos and articles on the internet relating to bankruptcy, but the majority are not Canadian and Canadian laws are very different from those in other countries.