Surviving the Emotional Toll of Bankruptcy

US News

Maybe money can't provide happiness, but it can certainly inspire negative emotions, including sadness, grief, and shame. Those are just a few feelings people may experience when they claim bankruptcy.

Chapter 7, the most common form of consumer bankruptcy in the United States, involves handing over one's non-exempt assets to a trustee, who then allocates funds to the filer's creditors, eliminating all or most of his or her debts. With Chapter 13 bankruptcy, filers undergo a financial reorganization to pay off debts with a goal of preserving assets, such as an estate. Those who file for Chapter 7 are typically people who find themselves in such financial ruin that it's not worth filing for Chapter 13.

While the financial consequences of bankruptcy are disconcerting, the mental burden can be overwhelming, with wide-reaching effects. "It's important to acknowledge the act of filing bankruptcy can be psychologically difficult, cause stress on relationships, and even be traumatic for a family," says Joseph Goetz, president of the Financial Therapy Association.

The focus is often on the financial steps--compiling a comprehensive list of debts, hiring an attorney, seeing the case through--but neglecting the emotional aspect can have long-term consequences. Many people who turn to bankruptcy have juggled their debt for so long that they're emotionally exhausted by the time they're ready to file. According to Rebecca Snyder, president and founder of Evergreen Financial Counseling in Salem, Ore., the problem is more internal than external. "Oftentimes a person's self-esteem takes a stronger hit than their finances," she says.

[Read Do You Need Help From a Credit Counselor?]

Many perceptions about bankruptcy are false, according to financial therapists, who provide counseling to people in need of emotional support due to a monetary crisis. While many general psychologists have offered this form of treatment for a number of years, the financial therapy industry is a relatively new field that has grown significantly in the past few years, as more people are coping with the effects of the poor economy. Filers may be concerned they've accumulated so much debt that bankruptcy won't offer relief, worry what their family thinks about the situation, or assume their credit score will be permanently destroyed. Such misguided beliefs build anxiety and fear, and only make the process more taxing. Yet no matter how much debt someone owes, bankruptcy is always a viable option. Some family members may disapprove, but their judgments are irrelevant if bankruptcy is the best solution. Yes, bankruptcy is a black mark on a credit history, but it is erased after 10 years.

"Bankruptcy is never something someone wants to fall into, but it gives you the breathing space to make a fresh start," says Andrea Fisher, an attorney with Squire Sanders in New York City who specializes in bankruptcy. When a client feels isolated--like they're the only person who has filed for bankruptcy--Fisher emphasizes they're not alone in that frightening financial realm. "Misery loves company," she says. "Show them the statistics. Let them know that there are a lot of other people who file for bankruptcy."

Some believe an attorney's role is strictly to provide legal services, not emotional support. Snyder disagrees: "My opinion is that the relationship is very similar to a doctor and his bedside manner. You can have a doctor who tells you that you have one year left to live and you can look at them and feel their emotional support. Some attorneys can and should provide the same kind of hope to their clients."

[Read Are You Too Broke to Go Bankrupt?]

However, sometimes the process is so overwhelming that people break down in their attorney's office--or even the court room. To avoid the latter situation, Fisher says attorneys should validate their client's feelings throughout the process and help them feel empowered to take control of their finances and their emotions. "They need to realize that this is not something they have to let continually upset them," she says.

Additionally, it's important for people to reverse their view of bankruptcy. Goetz says many think of it as something shameful and indicative of failure, when it should be seen as a path to a new beginning.

The experience can also be a learning tool. Goetz says bankruptcy itself shouldn't be a filer's only goal but rather part of a long-term plan to restore financial stability. If people distrust themselves with money after bankruptcy, he recommends they implement financial strategies they weren't using before, such as setting up automated savings.

Before becoming a financial therapist, Snyder worked as a grief counselor to people who lost a loved one. She says grieving the death of a friend or family member is similar to grieving the loss of financial identity. "People who file for bankruptcy need to come to terms with realizing that it's OK to have this moment of honesty and clarity of themselves and that they need help," Snyder says.

[See Get-Out-of-Debt Resolutions for 2013]

Blame is another critical component. Although many people's financial situations are a result of the poor economy and other elements outside their control, Snyder says it's important they take ownership for the things they had control over. The next step in the recovery process: Separating one's net worth from personal worth.

The rest is dependent on how well a person crafts a plan for handling finances from then on. To make things easier, Snyder suggests people set themselves up for small victories by making small, achievable goals. "As they accomplish them, then they can start to feel like they're changing," she says.

Anne Brennan Malec, a licensed clinical psychologist and marriage and family therapist at Symmetry Counseling in Chicago, says true emotional recovery lies in whether people are able to change their financial habits. Says Malec: "This process is so painful, in so many different ways, that if you're going to go through it, you have to learn something through it."



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