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Bankruptcy is not a quick fix

DEAR BRUCE: My friend has been telling me how much trouble he is in financially. He has more credit card debt than he can handle and other debt that is in “write-off” status. He wants to file bankruptcy. He doesn’t seem to understand the long-lasting implications of this. I think he’s trying to take the easy way out.

He is 30 years old and makes about $28,000 a year. He has told me that among his debts, he is worried about a $10,000 student loan. Any thoughts? — Reader, via email

DEAR READER: I am missing some information here.

You say you think your friend is looking for an “easy” way out. I suppose that by some people’s definition, an easy way out is to declare bankruptcy. But in almost every case, that will not help him with the $10,000 student loan debt.

You didn’t indicate how much credit card debt there is, just more than he can handle, and you mentioned debt that is in “write-off” status. Just because debt is written off doesn’t mean the lender has given up trying to collect the money. This debt can be sold to another party at a discount, and the second party then will attempt to collect it.

If he truly has no money, he could consider Chapter 7, or absolute bankruptcy, which could be denied. It is not as easy as it once was to be granted bankruptcy. He might be eligible for Chapter 13, or reorganizational bankruptcy, which keeps the wolf from the door and allows him to make payments until all the creditors receive their money. As I previously mentioned, no matter which bankruptcy he might choose, almost all cases will not cover his student loan debt.

There has been some rumbling in this election year to allow students to discharge their obligations. To me, that is a terrible lesson to teach: that people who have borrowed money to further their education for their own personal interest can then stiff the lender that provided the money. This is a topic for another day.

DEAR BRUCE: My son, who is a sophomore in college, has a good chunk of money in savings. In fact, he has enough money saved to pay for the college that he’s attending, yet he has insisted on taking out student loans.

He and I argue about this all the time. I don’t want him to have this debt. He says there’s nothing wrong with borrowing the money and investing it, and that since there is no interest, whatever he earns is just gravy.

I think he is doing something illegal. Am I wrong? — Concerned Mother, via email

DEAR CONCERNED MOTHER: Your son is not the first to do what you describe. Is there anything improper here? That depends on whether he answered all questions truthfully in the loan documents he signed.

You say that whatever he earns is “gravy.” On the other hand, if he loses money on his investments, the gravy goes and he has to pay back this loan when the time comes from some other source.

The fact that your son has saved money says a good deal about him. If he is able to do this without any impropriety, and if he understands that investments don’t always rise in value, frankly, I have no problem with it. I actually admire his abilities and would probably encourage him.

Send questions to bruce@brucewilliams.com or to Smart Money, P.O. Box 7150, Hudson, FL 34674. Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided. The Bruce Williams Show can now be heard at www.brucewilliams.com on the Made in America Broadcast Network.

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