Understanding Your Bankruptcy Clients

Our society has lots of names for people who fall into debt. We call them deadbeats or debtors. We label them irresponsible. We are quick to judge.

But a bankruptcy lawyer’s job is to help people get relief from their debts – not to judge them. To do the job well, it helps to understand why people fall into debt in the first place and why it’s so hard for them to dig their way out.

Sometimes, there’s an obvious cause, such as a terrible illness that leaves a client with crippling medical bills. But often, people fall into debt for subtler reasons that have a lot to do with the way they think about finances. Or don’t think about them.

Here’s some of the psychology behind debts.

Financial illiteracy. Some people just don’t understand how money works. It’s seldom taught in school, and many people don’t learn it at home either. People who aren’t financially literate have trouble managing their finances and are particularly vulnerable to scam artists and “get rich quick” schemes.

Lessons from our parents. In some families, money is an off-limits topic. In others, the parents manage money poorly, or money is a constant source of stress and arguments. These early lessons can cause people to think of finances as an unpleasant topic that should be avoided. This attitude gets in the way of basic financial tasks like budgeting, balancing a checkbook and paying attention to credit card balances.

Failure to adapt to changed circumstances. When someone loses a job or takes a pay cut, logic tells us that it’s time to slash expenses. But our brains aren’t always wired to adapt quickly, and many people are too slow to alter their spending. Or, they convince themselves that the changed circumstances are only temporary. By the time people adjust their spending to their income, it may be too late to dig out of debt.

Divorce means a couple must divide their assets and maintain two households – usually without a corresponding increase in income. Some people find it hard to transition to the new financial reality.

Peer pressure. Some people fall victim to pressure to “keep up with the Joneses” by buying houses, cars, clothing and vacations that they can’t afford.

Addictive behavior. Someone may joke about being a shopaholic, but an addiction to buying things, like a gambling addiction, is no laughing matter. Some people seem hard wired for addictive behavior. Others use shopping or gambling to compensate for a terrible job or an unhappy marriage, or to fulfill other unmet needs in their lives. 

Student loans. It’s no secret that student loan debts are rising. And when people are burdened with student loans, there’s not as much money available to pay for the rest of life’s necessities. Unfortunately, many students don’t get good advice about choosing a relatively affordable college, applying for grants and scholarships, and taking steps to keep student loan debt to a minimum.

Spending Money Before You Have It. The promotion you’ve been promised. The end of the year bonus. The inheritance when Uncle Harry dies. People can be amazingly good at convincing themselves that something is a sure thing. But they can end up in real trouble when they go into debt and then the money doesn’t come through.

Poor communications skills. Husbands and wives sometimes have difficult dynamics around money. For example, one may be a spender and the other a saver. To keep peace, they may avoid talking about –or managing -- their money at all. Or, one spouse may overspend in an effort to make the other one happy. A spouse may secretly accumulate debts that the other spouse knows nothing about. These sorts of family dynamics can spell trouble when debts exceed income.

People slide into debt for many reasons. Understanding the cause of a client’s debts can help a bankruptcy lawyer take a compassionate approach to representation.