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Many avoid bankruptcy out of fear

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The mystery isn’t why so many people file for bankruptcy each year. It’s why more people don’t.

Each year, only a fraction of the Americans who could benefit financially from bankruptcy actually seek relief. Economists say some don’t file because collectors aren’t aggressively pursuing them, while others may strategically delay filing because bankruptcy could benefit them more down the road.

Many bankruptcy attorneys have a much simpler explanation: Fear, a lack of information and misplaced optimism keep people from getting a fresh start.

A temporary pause

About 14% of U.S. households — or roughly 17 million — owe more than they own, according to Federal Reserve Bank of New York estimates. Many of these households could benefit from having their debts wiped out, but fewer than 1% of U.S. households actually file for bankruptcy each year. Last year, there were 752,160 personal bankruptcy filings. Researchers refer to this gap as “missing bankruptcies” — the filings that could be happening, but aren’t.

Now, there’s an additional set of missing bankruptcies: the cases people normally would have filed in recent months, but haven’t. Bankruptcy filings dropped dramatically in the second quarter of this year, to about 60% of the average for the previous five years.

Courthouses were shuttered by pandemic closures, which made it harder for creditors to pursue foreclosures and wage garnishments. Those are two big drivers of consumer bankruptcy filings, says David Cox, a bankruptcy attorney in Lynchburg, Virginia, and co-author of “Consumer Bankruptcy: Fundamentals of Chapter 7 and Chapter 13 of the U.S. bankruptcy code.”

Borrowers have benefited from various forms of coronavirus relief, such as suspended payments on federal student loans, mortgage forbearance and expanded hardship options for loans and credit card accounts. The $600 weekly bump in unemployment checks, which expired in July, also kept many people afloat, Cox says.

Lower jobless benefits, along with the reopening of courts and continued high unemployment, mean the lull in bankruptcy filings is likely temporary, says Jenny Doling, a bankruptcy attorney in Palm Desert, California, who serves on the American Bankruptcy Institute’s Chapter 13 Advisory Committee.

She worries that people will wait too long to file. Too often, people drain retirement funds or other assets that would be protected in bankruptcy to pay debts that will ultimately be erased, she says. Putting off bankruptcy also can make it harder to come up with the $1,500 needed to file a typical case.

You won’t lose everything

Cox says many of his clients delay filing because they fear they will lose cars, homes and other property. They are pleasantly surprised that they aren’t stripped of everything they own, he says.

“There’s a misunderstanding about how bankruptcy works and what it would take from you,” Cox says.

The majority of people who file the most common type of bankruptcy, Chapter 7, don’t have to give up any of their possessions. The types and amount of property you can keep vary by state, but typically include clothing, professional tools, wedding rings and at least some equity in your home. A few thousand dollars of equity in a car is usually protected as well. If you have assets that wouldn’t be protected in Chapter 7, you could file for a Chapter 13 repayment plan instead.

You can get credit again

A bankruptcy filing remains on your credit reports for up to 10 years. But credit scores can start to recover soon after you file. It’s possible to get a VA or FHA mortgage two years after a bankruptcy. Most loans require you to wait at least four years.

People can start to rebuild credit a few months after their bankruptcy case is discharged by getting secured credit cards, which require a deposit, or credit-builder loans, available from some credit unions, community banks and online.

The problem with anxiety — or unrealistic optimism

Debt often leads to anxiety and depression that makes taking action difficult, Cox says. Many of his clients arrive at their first meeting with grocery sacks full of unopened bills.

But misplaced optimism can also be a problem. The same hopefulness that causes people to take on too much debt also can lead them to put off the reckoning, he says.

“You always think, ‘Our income’s going to increase, things will be better going forward,’” Cox says.

Anyone struggling with debt now should consider consulting a bankruptcy attorney, Doling says. The first visit is often free, and referrals are available from the National Association of Consumer Bankruptcy Attorneys. Consulting with an attorney doesn’t obligate you to file, but it could help you avoid expensive mistakes if you later decide that’s your best option.

“The people who do much better in bankruptcy are the ones who came in and got advice early on,” Doling says.

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‘I could live on my Social Security and still save money’: This 66-year-old left Chicago for ‘calming’ Costa Rica — where he now plans to live indefinitely

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Editor’s note: This article was first published in September 2019.

A school break changed 66-year-old Martin Farber’s life forever.

In 2007, his daughter — who at the time was attending Illinois State University — decided she wanted to spend a college holiday volunteering in Costa Rica and staying with a local family, he explains. She came home raving about the experience, so, in 2008, Farber — who at the time was living in Evanston, Ill., just outside Chicago, and selling cars — took his first trip there.

“It was a big surprise to me — bumpy roads, dogs barking in the streets,” he says. “I wasn’t enamored at first.”

But as his daughter began traveling there more and eventually moved there for a year, he took additional trips to Costa Rica. It quickly grew on him — in particular, the people. “The Costa Rican people are warm, open and friendly. I felt less invisible in a strange country in a strange town where I didn’t speak the language than I did in Evanston.”

And the more time he spent there, the more it impacted him: “On one of my trips there, I thought: My daughter’s life makes more sense than mine,” he says. “There was nothing wrong with my life, but I felt that my life was out of context with who I’d become. … I would have bills and make money to pay them, but that had ceased to be satisfying,” he recalls. “I knew I needed to change my life — there was no more joy in what I was doing.”

What’s more, when he’d return from his Costa Rica trips, people noticed. “I would come back, and my friends and therapist would say: You seem better after you go,” he says with a laugh.

A view from the hot springs near Martin Farber’s home in Costa Rica.


Martin Farber

So in 2014, he packed up and moved to Orosi — a picturesque, lush small town with waterfalls and hot springs a little over an hour’s drive from San Jose — promising himself he’d stay for two years. It’s been five, and he now plans to stay in Costa Rica indefinitely. (Though Farber notes that, to him, “it’s not a retirement; it’s a chance to lead a new and different life.”)

Here’s what his life is like, from costs to health care to residency to everyday life:

The cost: While many expats spend way more living in Costa Rica, Farber says: “I could live on my Social Security and still save money.” He says “a person can live on $1,200 per month, two people on $2,000.” The key, he says, is to live more like he does and as the Costa Ricans do — in a modest home, eating local food and purchasing local goods.

Indeed, Farber himself spends just $300 a month for rent (he rents a home from a friend who moved recently and gave him a good deal), roughly $225 a month on groceries and just $50 a month total on water and electricity (the temperate climate in Orosi means you rarely need heat or air conditioning). The veteran Volkswagen
VOW,
+0.96%

 
VLKAF,
+0.98%

salesman saves money by not owning a car (those over 65 ride municipal buses for free), which can be a significant expense in Costa Rica; for his cellphone, “I pay as I go … roughly $10 may last me a couple weeks or more,” he says, adding that “many people handle there their cellphones this way. You can get them recharged anywhere.”

His major expense is travel: He goes back to the U.S. to visit his mother in Florida several times a year and lately has spent part of the summer in Chicago helping out a friend with a dealership there. He also spends a good amount of money on health care. He says that while flights can be had for as little as $350 roundtrip during offseasons, the cost can be much higher the rest of the year.

In the saddle.


Martin Farber

Health care: Farber, who has permanent resident status in Costa Rica, says he pays about $90 per month to participate in the country’s health-care system — adding that the health care he’s received has been very good. (A 2018 study of health-care quality and access in more than 190 nations ranked Costa Rica No. 62.)

When he developed a detached retina, though, he paid for the procedure out of pocket so that he didn’t have to wait for the required surgery, he says — adding that the entire procedure cost him about $5,000. “I would have had to have waited four days,” he says, if he had not paid to expedite matters. “That might have been fine, but it might not.” And he adds that the quality of care depends on where you get it in the country.

Lifestyle: Though Farber says that he “moved here with no goals and no agenda,” he’s found plenty to do. “I take Spanish lessons two days a week for two hours a day. It’s been great. I never thought I would acquire a usable language in my 60s,” he says. He also rides his bike all around the area, does some writing and belongs to a community group that undertakes projects to improve the area.

And he often simply takes in nature, which he says has been an essential part of why he feels calmer and more relaxed in Costa Rica than in the U.S. “I live at 3,000 feet but in a valley surrounded by coffee fields and lime trees and water. At night, if I open the windows, I can hear the river rushing by,” he says. “It is very calming … hundreds of trees everywhere … you know the Earth is alive.”

The historic Iglesia de San José de Orosi.


iStock

Cons: “I don’t want to overglorify. It’s not without its problems,” Farber says of Costa Rica. “There are social problems and downsides.” He notes that crime and petty theft can be a problem (“I am cautious,” he says of his approach) and seem to have increased since he moved there, and adds that he misses out on some cultural things because of where he lives. And, he says with a laugh, “I can’t order Thai food at 9 at night.” But, he adds: “These are trade-offs — in the afternoon, I get to walk in the coffee fields and see flocks of parrots.”

Residency: To qualify for Costa Rica’s pensionado visa, expats must prove that they have a pension of at least $1,000 coming in each month. (Here are the details of that program.) Once you have lived in Costa Rica for three years, you can apply for permanent residency. Farber used a lawyer to help him figure out the ins and outs of residency options; his entire path to permanent residency took about a year, he says.

The bottom line: “After five years I am still amazed and surprised that I made the decision to lead a life I never thought I would,” he says. And while he may not stay in Orosi forever — “the town doesn’t have an ambulance, [and] I don’t know what it will be like to be 80 there,” he says — he does plan to stay in Costa Rica in no small part because of the people and sense of community. “I have the feeling that life is good here,” he says. “It’s hard sometimes, but we are all in it together.”



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