Author Archives: Cathy Moran

Is It OK To Break Your Promise To Pay In Bankruptcy?

Are all promises created equal?

Are they binding forever?

Detroit’s municipal bankruptcy case can help us think about choices when you’ve promised more than you can deliver.

Individuals with overwhelming bills often resist the thought of filing bankruptcy because they’ve promised to pay their creditors.

Breaking that promise and discharging their debts makes them deeply uncomfortable.

It’s my debt and I want to pay it.

Detroit would like to pay its debts, too. You know that bankruptcy was not the most appealing choice for the people in charge.

But Detroit has made more promises than it can keep.

  • It borrowed money and promised bond holders to repay their money and interest.
  • It promised retirement benefits to its employees.
  • It promised to provide current services to residents.

And the cost of keeping those promises now totals more than the money available.

The promises were honest and sincere when made.

Maybe some of the shortfall was avoidable if different choices were made in the past.

Equally, some of the shortfall results from things very hard to plan for: shifts in the economy, the Great Recession, escalating health costs.

So, what to do now when it doesn’t add up?

As much as we’d like, we can’t change the past. We can only make choices for the future.

Today’s choices

Detroit confronted the same situation individual families face: more promises than money.

It’s using bankruptcy to settle those claims in an open and judge-enforced process. It may be temporarily painful and messy, but the result will free the city to move forward.

Real, flesh and blood people have the same problems. They’ve promised more than they can perform.

In my view, the financial choices for individuals are more complicated than even a huge enterprise like a city. Unemployment, illness, divorce, accidents, taxes and natural disasters all contribute to the financial problem.

Some obligations to pay are imposed and some are assumed. Sometimes, the total is just too much.

No amount of wanting to honor financial promises alone makes it possible.

People get old

Unlike a city or a corporation, people age. They reach a point where they can’t work or want to work less.

People need to retire. And for most of us, that means living on less income than we have now.

Unless you save something now for retirement, your golden years may be more lead than gold. Or you become dependent on others.

Some times, the cost of keeping promises is simply too high in the light of today.

Circumstances change, not always for the better and not always in predictable ways. A promise that was honest when made may no longer be possible to perform when things change.

So, let’s not get hung up on commercial promises.

Cost and benefit of broken promises

Bankruptcy law extracts some cost for the legal privilege of breaking promises. Your make full disclosure about your financial situation.

If you have substantial income or substantial assets, some of that has to be used to pay creditors.

But society’s bet is that putting financial trouble behind you and starting fresh is better for us all than trying to keep promises that are now impossible.

Be open to learning a lesson from Detroit.

San Francisco Bay Area Bankruptcy SpecialistCathy Moran helps individuals and small businesses in Silicon Valley with their bankruptcy issues . She can often be found on Google+ and on Consumer Ledger, where she shares information about consumer protection issues and personal finance.

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