The stigma of bankruptcy

Why is it that consumers and small business owners see bankruptcy as a mark of shame to be avoided at all costs when bankruptcy is touted as a new beginning and a positive step for corporate America?  Is there really anything different about “bankruptcy” when the debtor is General Motors than when it is Joe the Plumber?

The news about big business bankruptcy filings stress the opportunities in bankruptcy, to be rid of unnecessary assets, to manage overwhelming debt, to restructure to move forward.  Those are the same opportunities that exist for the individual in bankruptcy.

If the highly educated, very experienced management of America’s biggest companies made mistakes that drove their businesses into bankruptcy court, why do individuals, who usually come to financial matters without much training or  financial reserves and resilience, think it is a mark of personal failure to do the same?

Most of the “stigma” of bankruptcy today exists in the head of the individual.  I often ask clients if they study the list of new bankruptcy filings to ferret out which of their neighbors has filed bankruptcy?  They look at me as though I was crazy, though they imagine that their neighbors will do that if they were to file.

I go on:  would you think less of your neighbor if you knew they had filed bankruptcy?  Statistically, there is a very strong correlation between bankruptcy and divorce, job loss, and illness.  Those are events largely beyond the control of the individual.  Those bankruptcy triggers are not marks of character defects.

As much as my clients fear what others might say about filing bankruptcy, I think the resistance to getting a fresh start is driven as much by self image and pride.  If we equate bankruptcy with personal catastrophe, then we want to avoid the label.

The catastrophe is whatever events have brought the client to needing bankruptcy;  a bankruptcy discharge is the step toward reorganizing and moving forward.  Let’s add some nuance to our thinking about what “bankruptcy” means.