How to Go Bankrupt

I was listening to a podcast on my morning walk the other day when the speaker referred to an Ernest Hemingway quote about bankruptcy. Here it is:

"How did you go bankrupt?" "Two ways, gradually and then suddenly."

I was struck by the simplicity and truth in this statement. Here's my spin on it:

1. People start to go bankrupt slowly when they spend more than they earn. At first, they can keep up with the extra payments, increasing debt, juggling finances, etc., but eventually, the small spending starts to add up and puts increasing pressure on them. This is how they start to go bankrupt -- at a very gradual (maybe even unnoticeable) pace.

2. Then something "big” happens -- a layoff, a baby (forcing one parent to stay home), an accident, a bad loan (think housing), and so on. Suddenly, the family that was going bankrupt gradually is upside down in a BIG way. There's nothing that can be done (in their minds), so they go bankrupt.

To an outside observer, it might seem that these people went bankrupt very quickly due to a bad/expensive event in their lives. But the truth is that they had been going bankrupt for a long time. Their finances were getting progressively worse over time and they just needed a big push at the end to send them over the edge. Their actual bankruptcy may have started years and years prior to the actual event when they started the cycle of poor money management and excessive spending.

This is why I continually remind people that spending less than they earn is a must for financial success.

Comments

[Heidi]

Sometimes the simplest observations or statements are the most profound. Thanks for sharing.

[Jesse]

I think the "gradually" is the biggest piece. Yes big things can happen that put you in a hole but you can dig out. For example I got laid off while I was working full time to get through school (and I had a mortgage). Then right after that I was in a bad accident and had no health insurance. All told I racked up about 40k in debt. Ive dug my way out of that for the most part so Im convinced doing the right things you can survive almost any of the "common" things that happen without going into bankruptcy.

[Jim]

Good topic. I remember during the debates on bankruptcy laws we had the press talking about job loss or medical bills being the primary cause. Most often, however, this is just what finally pushed someone over the edge. If most people would not have racked up a pile of debt and had emergency savings, life events, such as the job loss or medical issues would not have forced the person into dire financial situations.

[Raymond Caxton]

I know from personal experience the pain of bankruptcy, I would never say that bankruptcy is as bad as losing a loved one, but it is life-altering and leaves deep wounds both to the psyche and the credit report.