Perceived Stigma About Filing a Bankruptcy

I recently received a call from a financial advisor that works at one of the largest banks in the world. One of his clients accepted a forbearance plan on his mortgage during the Covid-19 pandemic and hadn’t paid his mortgage for more than a year and owed more than $30,000 in mortgage arrears. His client was told by the mortgage company that the missed payments during the forbearance period would be put at the end of the loan.

The mortgage company however, did not honor this agreement and demanded the entire sum immediately for the missed mortgage payments. This scenario is happening to so many borrowers across the country and people are being put into foreclosure for these missed mortgage payments that they thought would be deferred to the end of the loan.

I asked the financial advisor about his client’s current financial circumstances and their ability to repay the $30,000 from savings. I was told that his client did not have the money to pay the mortgage arrears from his savings, but was able to pay the ongoing mortgage payments each month from his income.

I suggested to the financial advisor that his client could file a Chapter 13 bankruptcy and pay back the mortgage arrears interest free over a five year period. I explained to the financial advisor that this is precisely what a Chapter 13 is used for. Immediately upon mentioning bankruptcy, the financial advisor dismissed the advice outright and said his client shouldn’t file bankruptcy. I asked him why and was told that he shouldn’t “trash his credit” with a bankruptcy. Instead, the financial advisor said he was going to tell his client to withdraw the money from his retirement account even though he would end up paying over $10,000 in taxes and penalties by doing so. In addition, his client would have to sell stocks in his retirement account to get the $30,000. Selling stocks in a bear stock market is not sound financial advice. I told the financial advisor that this was bad advice he was giving to his client, as a Chapter 13 bankruptcy would cost less than half of cost of withdrawing money from his retirement account. In addition I explained that the retirement savings was completely safe (exempt) in a bankruptcy. It was clear to me immediately from his tone and reaction to the mere mention of a bankruptcy, that this financial advisor was going to give bad advice to his client. I was correct and he dismissed the idea outright without ever explaining the option to his client. This type of ignorance of the bankruptcy process has caused countless numbers of people to listen to bad financial advice for no other reason than the perceived stigma of filing for bankruptcy protection.

If you are in financial distress, please seek advice from an experienced bankruptcy lawyer, so you know what options are available to you. At least this will give you the peace of mind to know which options will put you and your family in the best financial position moving forward. Avoiding a perceived stigma won’t help you save your home and preserve your assets, but a bankruptcy might.