Get Your Own Economic Stimulus – Through Bankruptcy

by Wendell Sherk, Missouri Bankruptcy Attorney

August 25, 2011

The U.S. economy needs a stimulus.  Many American households would be better served by filing bankruptcy to free-up some income to support their family, rather than waiting for Congress or the banks to help move us forward.

It doesn’t sound right, does it?  You file bankruptcy to help the economy?

But right now, President Obama is pursuing a continuation of a payroll tax cut which works out to approx. 2% from the average person’s paycheck.  That’s roughly $1,000 a year of extra income left in the median household’s paycheck.  Nothing to sneeze at of course.  And in middle and lower income families, that money will be spent to help keep everyone afloat — stimulating the economy!

But I can do better than the President for quite a few of those families.   The median family currently spends twice that much in consumer, non-mortgage debt service.   So the median household’s bankruptcy filing, all other things being equal, has a decent chance of freeing up even more money each day and each year than the payroll tax holiday will. Instead of spending several more years living on the edge while you try to payoff the credit cards and payday loans, just get rid of them.

To the extent that debt is discharged through bankruptcy instead of being repaid, there is a loss caused, primarily to the largest banks in this country.  However, in theory, these banks are in much better shape than they were 3 years ago.  In fact, a problem we have right now is that the banks have money but either will not lend it out or can’t find viable borrowers.

So instead of continuing to recapitalize the already-well-capitalized banks, who won’t or can’t re-lend that money to consumers or businesses, consumers could cut out the middle man.  Take the extra couple hundred a month currently being spent to pay off credit cards and, instead, fix the car.  Fix up the leaky roof.  Buy the kids new clothes.  Do it with cash, not on credit.  And, yes, save for a rainy day too (maybe the bank will find some borrowers for the money!).

Obviously this prescription is not for everyone.  Your mileage may vary.  But it’s important that folks not simply consider consumer bankruptcy in the context of individual cases but also of its place in society.  Individuals are still too highly leveraged.  They are trying to pay down debt.  And especially by giving up houses they can’t afford, some are making dramatic changes in their leverage.

But a consumer-driven economy ultimately needs the consumers to come back — and not driven by overspending on credit.  So starting over fresh and using current income to meet current needs could be a jump-start for more than just the individual debtor.

Photo Credit: California Department of Public Works

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively. I have represented bankruptcy trustees as well as creditors. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website: STLBankruptcy.com

Last modified: November 23, 2011