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Personal bankruptcy is not a topic that is relevant to most of us – until it is. The number of people filing for bankruptcy over the last 20 years ranged from a low of 374,000 in 2022 to over 2,000,000 in 2005.
The top reasons that cause people to declare bankruptcy are job loss, medical bills, an unaffordable mortgage, overspending (including on credit cards) and helping other family members with financial assistance. Student debt accounts for only 0.1%, in large part because of federal restrictions on using bankruptcy to avoid repaying education loans.
While much information is available about the technical aspects of avoiding bankruptcy and steps to take when filing for it, there isn’t much written about the emotional costs. Bankruptcy can be emotionally as well as financially devastating. It can evoke very difficult emotions, not only for those going through bankruptcy but for their family, friends, employers, and coworkers. The ripple effect can affect everyone in the person’s sphere.
Common feelings are depression, shame, embarrassment, guilt, grief, anxiety, hurt, hopelessness, insecurity, numbness, and apathy. These emotions can be overwhelming and can severely impact a person’s career, relationships and physical and mental health.
People who file for bankruptcy often believe they have let themselves, their family and their friends down. They may feel like a failure and believe they are 100% responsible for their financial circumstances. They may worry about their financial future, their ability to pay their bills, and their ability to rebuild their credit. They can feel helpless and overwhelmed to the point they can have trouble sleeping, eating, and concentrating.
The first sign that you are in a serious financial situation is if you are technically insolvent. That means if you sold everything you owned, the proceeds would not be enough to pay off your debts. According to a May 27, 2021, podcast by David Steen, host of “Money For The Rest Of Us,” the Congressional Budget Office reported that 25% of Americans are technically insolvent, even though most have not filed for bankruptcy.
Even if the shame of filing for bankruptcy is so overwhelming that it is not an emotional option for you, if you are insolvent and struggling to pay your debts, it is important to take steps long before bankruptcy becomes an unavoidable consideration.
The first is coming to terms with the deeply rooted money scripts that you have around bankruptcy and its consequences. We know that all money scripts are partial truths. Exploring those beliefs – when they first appeared and the circumstances and context around them – can bring some objectivity to what it means to be insolvent or file for bankruptcy.
There are resources available to help you cope with the emotional challenges of being insolvent. The first step is to get into credit counseling. This is a necessary step you must take if you eventually go on to file for bankruptcy. To deal with the emotional fallout, engaging a therapist, especially a financial therapist, can be helpful. If that is not affordable, you may be able to find a support group.
Ultimately, if your path leads to filing for bankruptcy, doing so can remove some of the financial pressure you’re facing. It can free up some of your income so you can pay your rent or mortgage, utilities, and other necessities more easily. Essentially, the purpose of declaring bankruptcy is to serve as a fresh start if you’re overwhelmed by your debt.
Whether you file for bankruptcy or not, dealing with insolvency can be a hugely difficult experience. With time and effort, you can recover emotionally and rebuild your financial future.
Rick Kahler, MS, CFP®, CFT-I™, CeFT®, CCIM, is the founder of Kahler Financial Group, a Rapid City, SD-based fee-only Registered Investment Advisor.
Read more articles by Rick Kahler
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
