Financial Independence: Tough Times and Bankruptcy

When it comes to money, I continue to suggest that you read either the book, Your Money or Your Life by Joe Dominguez and Vicky Robbins or find the old taped course " How to Transform Your Relationship With Money and Achieve Financial Independence" by Joe Dominguez. Money along with Food are two things that live an emotional life within us that often distorts how we use and respond to them. This distortion leads to us acting in a way that may satisfy an emotion in the short-term but leads us away from what we want.

When you combine the emotion of your childhood regarding money, with the general lack of education we receive about it, it is no wonder that most of us have little to show for the amount of money that has passed through our lives.

The collapse of the real estate and stock markets in late 2008 and the tightening of consumer credit has affected both the overall economy and nearly every household in a significant way. I am in a tight financial position as a result of three events in 2007 and 2008.

1) My divorce settlement was negotiated in August through October of 2007, when the S&P500 peaked and my collective investments were near their maximum value. I agreed to current and near future cash payments to keep as much of my investments as possible. Although my non-real estate investments have bounced back since January of 2009, they are still significantly off their peak.

2) I have been subsidizing college costs for my three children for the last five years and thus spent down my cash reserves and increased my debt.

3) The collapse of the financial markets in September of 2008 caused an instantaneous disruption to the signing of new construction contracts. My primary source of income in 2008 was my position as VP of Finance and Operations for a small green energy construction firm. As the company completed its existing contracts we needed to lay-off nearly everyone and I left to go back to consulting and project management. My agreement had a significant profit sharing structure which was completely wiped out by the Fall of 2008 economic collapse.


In a nutshell, I took a hit which will take several years to overcome, but I am still in a better position than most American households primarily due to the principles in these courses and obtaining an education in how to invest.


Even in a period of temporary distress, the principles of achieving financial independence apply. Your ability to save and invest for the future is the primary lever due to the compounding effect of earning money on your invested money. The relationship between your spending and your fulfillment needs to be examined. Where do you get your morning cup of coffee? How much do you spend a year on it? Can you make it at home less expensively?


Change the word "coffee" to fast food or your favorite convenience or impulse spending item. The point is to either start saving some seed money or to at least begin paying down debt. I would suggest that you do both simultaneously. If you both build a cash reserve and add to the rate at which you pay down your highest remaining interest rate debt, you will both build a cushion in case of a lay-off or income disruption and create more money to build a cushion over time by reducing your outgoing interest payments. (In the current environment, paying off credit cards completely has lead to some people having their credit lines dropped so I would build cash reserves ahead of a complete pay down.)


What if the financial hole you are in is too big to work your way out of it? If your debt from real estate, credit cards, medical bills or the failure of a small business exceeds what you expect to earn in the next two years, you need to strongly look at bankruptcy. Bankruptcy is a legal remedy for obtaining a fresh start in a financial life. The rules are strict and bankruptcy will impact your ability to borrow money for the next 10 years but it can be a useful tool. Companies of all sizes use bankruptcy to secure a new life, when they can not both operate and meet their debt payments.


In many states, bankruptcy will not cause you to lose your home but in others it will. Your 401K and IRAs are protected in bankruptcy, so if they contain most of your savings, those savings will still be there after bankruptcy. One alternative option for eliminating debt that you will see advertised is debt restructuring for credit cards, this can halve your credit card debt but will create income tax liability for the debt that is forgiven as well as damage your credit rating. To see whether bankruptcy may be a tool on your road to financial independence, you will need to speak with a lawyer or financial advisor with bankruptcy expertise.


After two years, your bankruptcy will not affect your ability to qualify for a mortgage. The ten year damper on obtaining consumer credit may be a small inconvenience compared to having much of your income going to debt repayment and depleting your retirement savings.


The methods in the book, Your Money or Your Life, will help you live a life without taking on debt as a means of short-term funding. It is important to remember that even a person of modest means can gain leverage over their financial life. It is also important to remember that "possessing" money is not the goal but rather having that having financial resources supports the goal of living a grounded creative and values based life.