Is Bankruptcy Ever Okay for a Christian?

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

With the economy in the toilet for a few years now, people are hurting financially like they never have. And many are trying to get out of financial trouble by declaring bankruptcy. As such, I thought it would be interesting to look at the issue from a Christian perspective and see what various teachers are saying about it.

We'll start with Crosswalk who says bankruptcy is permissible for Christians:

Many biblical money management teachers say that Christians who file for bankruptcy should still pay back what is owed, even if it takes the rest of their lives. For a long time, that's what I believed.  However, during the process of writing Money Strategies for Tough Times, that teaching just didn't sit right with me.  As I thought about it and sought God's guidance, what kept coming to mind was the fact that Jesus didn't say to those he forgave, "Go now, leave your life of sin, and show up every Saturday to sweep the temple for the next twenty years." He gave them a fresh start. Likewise bankruptcy offers a fresh start for those who need one most, have owned up to their role in their financial problems, and have taken steps to avoid trouble in the future.

The Christian Courier comes to the same conclusion, but qualifies their stance a bit:

In conclusion, it is possible that, under certain dire circumstances, the child of God might be able to utilize the temporary protection of the bankruptcy code. He must be sure, however, that he does not abuse his creditors, and that he makes a diligent and honest effort to take care of his financial obligations — even should such require a protracted period of time.

Christian personal finance guru Mary Hunt has a different take on bankruptcy:

"It's absolutely legal, but it is not moral."

"I would say, 'You accepted these credit cards. You had the obligation to know what you were getting into,' " says Ms. Hunt, author of "Living Your Life for Half the Price." " 'You spent the money, and sure you had a big medical bill, but it probably would not have put you over the edge had you not already been deeply in debt.' "

To make this case, bankruptcy's critics often cite Psalm 37:21: "The wicked borrow and do not repay, but the righteous give generously." From sources such as Crown Financial Ministries and Dave Ramsey's nationally syndicated radio show, advice seekers hear they have a duty in most cases to keep their payback promises even when life throws them a curve ball.

Finally, here are the results of a survey given to Christians on the subject:

• 37.3% said that Christians should not file personal bankruptcy.
• 33.9% said it depends on the circumstances and that sometimes even Christians make mistakes and feel that this is the only answer to their debt problems.
• 28.8% agreed that sometimes it may be necessary to file personal bankruptcy to manage financial disaster.

So, what's the right answer? I think we can say that it's up for debate. ;-)

Here are my thoughts:

• Bankruptcy is a legal financial tool and I think it is ok for Christians to use it.
• That said, I think that they REALLY need to exhaust EVERY other option before they file.
• Personally, I think that even if they do get some debts forgiven, they still owe that money and should work to repay it. That's what I would do -- even if I never was able to pay it back completely.
• I think debt negotiation is a viable solution. For instance, if I owe someone $10,000 and they agree to take $5,000 and call it even, then this is acceptable. And this can be tried before or after bankruptcy (though doing it after would be strange -- they would surely take $5,000 over nothing.)
• This conversation just makes it that much clearer how important it is to focus on taking basic financial steps to be prosperous as well as avoid big money mistakes that can get us off track. If we do these, we should never have to worry about bankruptcy.

What's your take on the issue?

Comments

[Matt]

I remember a cartoon where two loan sharks were only going to charge %12 interest on a loan and the person asked why so low? The loan sharks stated "who do you think we are credit card companies?

It is sad state of affairs when you can look back and credit was not the way it is now. People loaned you money to make big purchases, not to enslave you with your poor decisions.

I think if a biblical writer were present here today some word of wisdom would be

"Just because the bank can loan you a large amount of money, does not mean you should take it. Be wise in your financial house and know what YOUR budget can afford."

Maybe if they listened to those words bankruptcy would not be a decision.

[MasterPo]

Matt - If someone takes the loan they are making both a legal and moral committment to repay it as per the terms of the loan. That is NOT "enslave"ment.

If you borrowed more than you can repay or just that your future expectations about repayment don't pan out that isn't the loaners' problem - it's yours.

As a nation and society we MUST get away from this whole notion that loaners are evil people because they expect to get repaid what they loaned out. :-(

[Russ]

Right on, MaterPo!

[SAFTM]

Here's Dave Ramsey's take (http://www.daveramsey.com/radio/highlights/?urlVars=Bankruptcy).

But I agree with the analysis. I also think a lot of people (Christian or not) file bankruptcy too quickly. It's definitely misundersstood and misused. I would avoid it at all costs, if possible, but not because I am a Christian (I am). If you get over your head, try to work through it. If you just can't, maybe it's right for you - but talk with someone first - (like a financial planner or a CPA, not a bankruptcy lawyer who will likely tell you to file...it's like asking an insurance salesperson if you need insurance...).

[SAFTM]

Oops - looks like the DR link doesn't work. If you search for bible and bankruptcy it will come up. I think of him when people ask Christian and money questions...

[Cindy]

The problem with that whole "Jesus forgives you, so you don't need to worry about what you owe others" thing is that creditors are *forced* to forgive you during bankruptcy. It's not creditors who decide whether you can file, it's a 3rd party who has no interest in the whole thing. Which means you're walking out on your debts without any real forgiveness, and to the detriment of other people. Debts should be repaid in whatever way you can do it. Bankruptcy my buy some time, but Christians need to pay their debts.

[Leigh]

It's important to remember that when one person declares bankruptcy, it's not the creditors who lose. They will simply disburse that loss among others to recoup the funds. So when we walk away from our obligations, we burden our brothers and sisters.

With that in mind, I feel we should do all we can to minimize the community burden, being responsible for what we owe and paying it back, however long it takes.

That's not to say you can't negotiate a more reasonable settlement, however, if the interest rate of the loan is punitive.

Deuteronomy 23:19
“You shall not charge interest on loans to your brother, interest on money, interest on food, interest on anything that is lent for interest."

[Todd]

Question asked another way; Is it moral to file for bankruptcy? My thought is that this question is not too dissimilar to other complex questions in that my answer is, it depends. It seems to me that it would depend on the circumstances of the individual. If they could pay back their debts, then I believe they have a moral obligation to do so. How many people file for bankruptcy with out doing all they can to pay their obligations?

Of course there are probably situations that people don't have any other options than to file.

[Whatever you choose to call me sir]

Just wanted to tell FMF great topic today. Always like to see topics I've never thought about.

[Tommy]

MasterPo - Would you draw a distinction between the money that was loaned out and the interest on that loan?

While loaning money isn't evil; some interest rates and fees come close to being immoral (but legal).

[Dee]

I could be wrong, but I thought the concept of bankruptcy came from the Old Testament. Every seven years, debtors would be forgiven:

Deuteronomy 15:1-2 (King James Version)

Deuteronomy 15

1At the end of every seven years thou shalt make a release.

2And this is the manner of the release: Every creditor that lendeth ought unto his neighbour shall release it; he shall not exact it of his neighbour, or of his brother; because it is called the LORD's release.

[Darin H]

I'll answer either "I don't know" or "it depends" in regards to the bankruptcy question. There should at the very least be a "Go and sin no more" if a Christian does file for bankruptcy - they should take on no more debt: credit cards, payday loans, personal loans, and probably even auto loans (mortgage would be an exception, but as small as possible as well).

[Matt]

MasterPo
If you were a carpenter making $40k a year and someone offers you to loan you $300k do you think they do not want to be repaid? Yes however you are so ignorant that you would be unable to pay back the loan and in biblical times you were put in debtors prision hence enslavement. You are a slave to your poor choices and someone stupid enough to loan you the money.

Becasue my wife and I make so much money we could have qualified for 3 times the house loan. I heard Gods voice saying that this is not right and you do not NEED 3 times the house. I am glad I listened to my gut feeling from God that I was not enslaved to money and my house unable to live.

Who is the evil one? Greed.

[JimL]

I agree with MasterPo.

[Matt]

MaterPO and JimL Ponder this
When I bought my first house 24 years ago I was 10% down with PMI insurance and at my max for amount lent to me for my salary. If they found out that I even had another bill of even $10 they would have denied me the loan on a $46k house.

Quite different then 2 years ago huh.

So what happened in the 20 years since then. Lets relax the rules, give all these "creative" ways of getting around this like 20/80 loans, interest only loans,125% of your house value loans, you name it the lending institutions were giving money away to anyone who could fog a mirror and people were eating it up.

How about the 75 year old who got a Fannie Mae mortgage for 30 years who was on SS? Do you think he is going to live to be 105? But they could not deny him because that would be age discrinimation. GOVERNMENT involvement in preventing discrimination.

Who is at fault? both the people who wanted it and the lenders and the GOVERNMENT backing the loans.

The people paying for this fiascio is all of us who are following the rules and are not declaring bankruptcy.

[JimL]

I believe in personal responsibility. We faces choices every day. People know how much they are borrowing and what the interest rate is that is being charged. Don't take on debt if you are not certain you can cover the payment/debt (even in more diffiult times).

[DirtyWater]

Is it ok for a company to dump encumbered assets to creditors and walk away from a commitment and call it a "business decision"? It is moral or "Christian" for a bank to blow itself up and then go crying to the government for a bailout and then pay their people billions in bonuses?

I don't understand why there is some higher moral imperative for individuals to pay their debts but the corporate/finance world has Chapter 11 and the Fed Discount Window and can enrich its own executives even in the face of failure. Where is the outrage? But the young couple underwater on their mortgage is somehow sinning and un-Christian-like for throwing the keys to the creditors and filing for bk...how does any of that jive? I don't see how anyone can pass judgement on their fellow man for seeking bankruptcy protection while Goldman Sachs, Citi, and B of A got away with all of their shenanigans and get a pass. Can someone tell me why the same standards don't apply?

[MasterPo]

Tommy - No. The reason being the loan risk. One of the reasons interest rates on some kinds of loans are so high is the greater risk of default these loans carry. The higher interest rate compensates the lender for the risk of making the loan. Someone with a good track record of repaying debt can always get a better rate. More incentive to be a good borrower than a dead-beat.

Matt (first post) - Divinity aside, you can't protect someone from bad or stupid mistakes. And it isn't the fault of the lender to do that protection. In modern times at a minimum a credit report would show at least some indication of the person's ability to repay the loan. If the lender still chooses to make the loan even with higher risk that isn't their fault. Ultimately it's the person who takes the money.

Matt (second post) - Agreed. Excepted don't overlook the Community Reinvestement Act (CRA) that *forced* many banks to make these loans. In the mid 90's I was listening to a financial talk show about mortgages and the CRA. A guy called in saying he was the loan officer at a bank and because of the CRA he was forced under threat of the law to approve loans he knows will never ever even have a glimmer of hope of being paid off.

A bank can not be "greedy" by making bad loan. Banks and other lenders (in the private sector at least, government is a whole other situation) make their money on the interest they collect. They want you to repay the debt. Going into default not only doesn't bring in the interest income but costs legal fees. It's in their own interests to make only good loans.

[MasterPo]

DW - Probably because if a business goes under (presuming it's of some decent size) it will impact directly a great many more people than if just an individual goes under.

If you believe that business is the engine of an economy then society is better served by trying to allow the business to recover then letting it collapse altogether. It shouldn't be an endless cycle either but at least some attempt is usually worth a shot.

[Rob S]

Like many others have said here, I think it is unwise, and probably immoral, for Christians to assume more debt than they can knowingly repay. I'd even argue that they shouldn't even come CLOSE to that level of debt since we don't know what the future God has in store for us holds as far as our income.

However, should Christians find themselves in a situation where they are unable to pay back a contracted debt (i.e., with a bank or other lending institution, not the $300 borrowed from a friend), they should not feel shame or judgment, or like they were doing something immoral.

Here's how a friend, a Christian financial advisor, explained it to me. The lenders are in the business of making money with money, knowing that it carries with it a certain amount of risk. With a secured loan (car, house, boat, etc), the agreement is that the borrower will pay back the loan, or the lender may take ownership of the collateral, again knowing that it may or may not be "worth" what is still owed on it. That is the risk they take. That is also why the interest rate on a secured loan is usually much lower than on unsecured debt (credit cards).

With unsecured debt, there is no collateral to repossess. Still the lender offers to lend the money with the full knowledge that they run the risk of not seeing it again. That is why they can get away with the high interest rates -- they have to charge those rates to cover the losses they know they will incur from debtors who don't repay. Even if the borrower overborrows, the lender is still a willing party to the transaction. The signature on the credit application is not so much a moral commitment to repay (from the lender's point of view) as it is an acknowledgement of the terms of repayment -- the high rates, the late fees, and the fact that they'll go after you in court if you don't pay. It's their business, and even the losses are built into their business plan.

Again, I wouldn't advocate bankruptcy as a way out of truly repayable financial obligations; however, don't feel bad for the lenders. The 7 years of black marks on your credit report will probably hurt you much more than writing off that bad loan will hurt them.

Now, paying back your in-laws or your friends...that's a different story....

[DirtyWater]

MasterPro- I understand your argument, but why the double standard? Why is chapter 11 and/or a bailout for a failed business just a function of the economic marketplace or whatever business excuse, but some guy throwing his keys to the lender on his house has some sort of big moral argument attached?

The poor decision making of a company's management gets a pass and preferential treatment under your argument...i suppose we can frame it as the "To Big To Fail" moniker. Using your arguments, the TBTF institution is under a greater moral imperative to manage itself to the point of stability and cohesion as to NOT end up producing a failure that is of great cost to society. But what do we do instead? We throw trillions of dollars at these TBTF companies and give their management a pass as they enrich themselves off the generosity of the taxpayer and public at large, and then have discussions about whether a personal BK is "Christian" or "moral". Failure of one's fiduciary duty is still failure, whether done by one man or a soulless, faceless corporation.

In my opinion--in this day in age--an individual strategically defaulting on a mortgage, letting the repo man take his car, or otherwise seeking bankruptcy protection is only exercising the same rights (less so) than a real estate developer dumping an underperforming piece of property or Citigroup taking billions in TARP money. The only difference is that the individual is judged as a "deadbeat" and has some moral standard applied to him while the corporation is making a "business decision" and there is no moral judgement at all.

And i do not believe that "business" is the engine of the economy; I believe individuals are the engine of the economy. There's nothing about INC or LLC that makes it any more important than me or you and the decisions we make with what to do with our money.

The individual comes out of BK with the scarlet letter on his credit report. A company comes out of BK with renegotiated creditor agreements and a new stock option plan for management. I don't understand why the same moral standards are not applied equally.

[Apex]

I am surprised the 7 year debt release and the 50 year jubilee are not discussed by the sources cited. Dee referenced it above and I believe she is right that this is part of what our bankruptcy is based on and also perhaps partially why bankruptcy staid on your record for 7 years and then was taken off, but a discussion on this topic does not seem complete without addressing the context of the 7 and 50 year biblical debt release.

Do you have any take on that FMF?

I understand times and circumstances were different then but the context of those laws would seem to atleast need to be dealt with before rendering a biblical verdict on the topic.

[FMF]

Apex --

Those are situations where the lender forgives the debt willingly (though "commanded" to) and was applicable only for believers. I'm guessing that most loans are not owed to Christians who follow either the 7-year or 50-year rules, so neither really applies in this case.

That said, if a lender or lenders comes to a debtor and says they are forgiving all the debt (on their own -- not forced to), then I'm ok with that and I think the loans do not need to be repaid.

[BD]

I think it depends on the situation. If the Christian racked up debt living high on the hog with a huge salary, and never saved, and then lost their job, and was unable to sell off all the 'toys', then bankruptcy would be irresponsible, and exactly what MasterPo was talking about in his comment.

But if it was someone who was saving, and living below their means, and frugally, but got hit with a lot of bad luck all at once that had nothing to do with the way they spent (ie, Horrible illness, a child with cancer, getting injured and being unable to work and not being able to collect benefits either...etc), then after exhausting all options, I'm sure Bankruptcy is fine. If the only way God is providing is bankruptcy, then why not take it? Especially if your loss has nothing to do with irresponsibility and you've always striven to be honest and responsible.

[Ginny]

These comments are really interesting, because you're using Christian ideology to moralize people into paying their debts to a system that wasn't very "Christian-like" in their dealings. These two worlds are running parrallel to each other.

All morality aside, look how the banks crashed the economy, how many people's houses are worth less than 1/2 of what they purchased them for, how many people are paying high interest rates on credit cards, how many people's retirement 401k's lost money, how many loans were given out that blew up in people's faces and were tricked into the loans from a loan officer? So if people made a bad financial decision because they didn't maybe know any better, or even had a medical problem they had no control over, they're morally wrong, or aren't considered good Christians?

You could generalize, because that's what you're doing- and say that those people were stupid because they didn't know how to manage their money, well, the banking system looks at Christians the same way when they know that they morally have you on the hook to pay back what you owe because Jesus wants you to.

Sorry, but I don't think that God or Jesus really had Credit Default Swaps, or the housing bubble or 30% interest on credit cards in mind, or other forms of trickery the banks used to make their money when the Bible was written.

If you take the moral position that these debts need to be paid back, then if God cares so much about Christian's money, then why does he let banks go on tricking people using deceptive practices to take it away from them? Why does he continue to keep people who are evil or immoral in the banking system taking advantage of people who are good moral Christians, and why does God make his people pay back people that are working for evil, or Satan? What is his plan for you? It doesn't seem like he's really on your side.

Also, why is God even an issue in a person's decision to file bankruptcy, unless the bankers put him out there to scare people into paying back their debts, and net in all the scared moral Christians. That's just one less bill collector they have to hire when God does the calling.

Why don't all the Christians pool all their money together, and open the "Bank of Jesus" and people will neither be financially or morally bankrupt?

[BD]

Ginny - it's your CHOICE whether or not to sign onto a high-interest credit card. If a Christian racks up debt on a high-interest credit card because they NEEDED that new TV or those new shoes, then yes, it IS immoral.

Or loans? Yes, it IS your choice whether or not to read the entire loan document, and research the loan carefully. If you can't read, then you have no business buying a huge purchase on a loan, such as a house.

Houses being worth less than paid for, or retirement accounts being worth less than they were are two reasons that are very UNlikely to bankrupt anyone.

Why does God allow all the evil in the world to happen? Two words: FREE WILL.
If He controlled everything, then we'd just all be robots. That's just not how life works. We have free will, to do good or evil. Having this choice is what makes us human.

Christians pooling all their money together to open the "bank of Jesus" is a great idea...in theory! Most of us have read Orwell's "Animal Farm" and as the book (and real life) goes, pooling resources almost never works. It almost always boils down to the corruption of "All animals (people) are equal, but some are more equal than others". Even Christians are not immune from sin.

[Jenny]

I agree with Cindy above. When Jesus forgave people, He forgave debts that were owed to him. Maybe this is something that Christian creditors should think about. However, it gives no cause for Christian debtors or other Christians to insist that creditors forgive what's owed to them. And I'm saying this as Christian who's very much in financial trouble.

[Steve]

Being a true Christian means that you are out to do things under your average Christian rule, such as not cheat, not lie, not kill someone. Just because you have made a mistake in your past regarding your finances, hence you need to file for bankruptcy, does not say anything about being Christian. I think people try to read too much into it by religion into this. If Jesus/God forbids you to file for bankruptcy, then how is anyone ever going to get past the financial mess that they got themselves into? Should we all just give up and hope that something miraculous is going to happen that can save us? If you want more information on personal bankruptcy, check out http://tofilebankruptcyornot.com