Have you ever mentioned to someone that you are considering filing for bankruptcy, only to hear them ask you who pays for that debt that you will be discharging?
Some people say that you will have no choice but to repay your debt, even in bankruptcy. Others say that taxpayers or the community as a whole will be held responsible. It can be very confusing!
Do taxpayers pay for people’s bankruptcies? Will you have to empty your wallet after all?
Here’s what you need to know before you file, so you can feel good about the choice you make:
What Does Bankruptcy Really Entail?
Some people might be confused about what bankruptcy actually involves. There is a pervasive idea that bankruptcy simply means dumping all of your debt and moving on with your life without a care in the world. This obviously is not true, and anyone who is facing bankruptcy already knows this.
Bankruptcy is a major decision and can have some serious drawbacks, such as a negative impact on your credit and a waiting period before you can take out new loans or otherwise utilize credit. However, there are a lot of benefits, too – especially for those who are dealing with insurmountable debt.
When you file for chapter 7 bankruptcy, you may lose ownership of your property or major assets. In exchange, you may be able to discharge the majority of your debts, excluding certain types. (For more on that, check out our blog!)
If you opt for chapter 13 bankruptcy, you can create a smarter, more manageable repayment plan for your debts. This way, you can repay the amount you owe in a way that makes sense for your financial situation. In this case, there is no discharge of debt at all!
However, chapter 13 is not right for every person or every situation. So, who is paying for discharge when it happens?
Do Taxpayers Pay for People’s Bankruptcies?
Debt discharge annually in the United States is over $70 billion each year. With such a large number, you might be wondering – do taxpayers pay for people’s bankruptcies? Otherwise, who does?
The idea that taxpayers pay for people’s bankruptcies is a common misconception. We are trained from an early age to understand that everything has to be paid for, either by the person who owes the amount or someone else. In the United States, communal expenses are often covered by taxes, so it is only natural to assume that taxpayers are responsible for making up the deficit left by discharged debt.
However, taxes are not used for discharged debt. This has led many people to think that there is another way that these costs are covered – by the public, at large.
The Common Misconception of Community Cost
When you talk to people about inflation, some people may be quick to blame specific people or groups of people for the rising costs of goods and services. One group that often gets the blame is people who leave debts unpaid. The idea is that those costs have to be paid somehow, so the companies and creditors who incur the deficits via unpaid debts pass those expenses on to everyone else by raising their prices.
This idea is understandable. Again, there is some precedent for this, since there are some situations in which this might happen. Think of a small, local business like a bakery or restaurant. If consumers regularly steal items or refuse to pay their debts for them, the business will have to make up for those losses somehow. They will typically do this by raising their prices for everyone else.
The difference between this familiar situation and that of a bankruptcy discharge is that major companies and creditors do not have the same razor-thin margins that a small business might. They have a lot more financial wiggle room. What’s more, they actually budget for the scenario of debt default before it ever happens.
A company with many clients or consumers will naturally assume that some will not repay their outstanding debts. These losses are built right into the company’s overall budget so that when they do inevitably happen, they will not have a major negative impact on the company’s bottom line. That means that the one paying for those bankruptcy discharges is the companies and creditors who debtors owed in the first place.
So, do taxpayers pay for people’s bankruptcies? The answer is no – and anyone who tells you otherwise is probably just misinformed.
Don’t Feel Bad About Needing Help!
For some people, learning that the taxpaying public is not really on the hook for the perceived cost of their debt discharge can alleviate some of the guilt that comes along with the process. For others, though, that guilt is a real hindrance. They can feel badly about contributing to a large deficit for the company or creditors who they were unable to repay, or to contributing to the public debt overall.
The truth is, there’s really nothing for anyone to feel badly about. Remember how we mentioned previously that around $70 billion of debt is discharged in the United States each year? While that might sound like a lot to a single person’s ears, it is important to put it into perspective.
The total debt in the United States is over $28 trillion, with credit card debt alone accounting for over $1 trillion. That means that the amount of debt that is discharged annually is only a tiny fraction of what is left outstanding – and certainly not something worth feeling terrible about!
As with any other helpful measure, debt discharge is designed to help those who need it most. If you are in a position to inquire about debt relief through bankruptcy or other means, you should not be in a position to feel bad about reaching out for help. A person who is relieved of their debt can more quickly return to contributing to the American economy in a positive way, after all!
If you need help getting started with the bankruptcy process, talk to the Van Horn Law Group.