By Dr. James M. Dahle, WCI Founder
Today, I would like to tell a story. You don't read stories like this very often, particularly on financial blogs and especially on physician financial blogs. People don't like sharing stories like these. In fact, people don't like hearing stories like these. But they happen all the time. I saw a net worth survey of physicians a few years ago that indicated that 1/4 of those surveyed live beyond their means and carry credit card debt. You don't have to think about that for too long before you realize that many of that 25%, even with a high income, run into major problems. This is one of those stories.
This is the story of a physician who declared bankruptcy. We'll call her Mary, although, as you might suspect, that's not her real name. She may not even be a her, and she may not even be a physician. But let's just go with it, remembering that these events are quite real, and the comments left on this post need to be sensitive to that fact.
A Story of Physician Bankruptcy
Mary was backed into a corner after her divorce, and she had to file Chapter 13 bankruptcy to prevent foreclosure on her home a few years ago. As a single mother who has already filed bankruptcy before, you can imagine why she might feel like a lot of the advice on this website doesn't apply to her. She wrote in asking for me to write something that would.
Mary's story begins with her divorce attorney seeing her name on the county court docket for an upcoming foreclosure on the home. After the divorce, she couldn't afford the home, and she was $150,000 underwater on it. She was working on a short sale, and she actually had a serious buyer under contract. In fact, the bankruptcy was more to facilitate the short sale than anything else, as she only had $25,000 in consumer debt and because her student loans—about $110,000—wouldn't go away in bankruptcy anyway.
Mary filed Chapter 13 bankruptcy just two days before the foreclosure (and the ensuing deficiency judgment in her state), and the short sale of the house went through. She kept the student loans outside of the Chapter 13 proceedings on the advice of her attorney in order to invite less scrutiny on the case (which bankruptcies on physician-like incomes seem to do). Of the remaining $25,000 in debt, only four creditors stuck around to file proof of claims. The rest just walked away, reducing the $25,000 to $10,000, and she was given a $400 per month payment with a decrease in her interest rate from 10%-15% to 4.5%.
Tax refund time came around, and she was due a tax refund of about $13,000, so she withdrew from bankruptcy so she wouldn't have to hand that over to the trustee as required. She then settled with the remaining creditors for 50 cents on the dollar and walked away with her retirement accounts and 529s intact.
At this point, Mary has her student loans paid down to $95,000, and she has a $26,000 car note at 10%. She can't get anyone to refinance her student loans, but her income is up and the significant attorney fees are long gone. She had to pay tax on the forgiven debt but not on the short sale, thanks to the 2014 Mortgage Forgiveness Debt Relief Act.
She shared this story with me and agreed to have it shared with all of you—recognizing that some would be critical, even mean—in hopes of providing some light at the end of the tunnel to other single-parent physicians facing foreclosure and bankruptcy. She states: “My intent was to start a conversation on how physicians post-bankruptcy could regain their financial footing. Also to show that bankruptcy is nothing to be ashamed of; it’s not the end of the world.”
A Very Brief History of Bankruptcy
Let's start with a brief overview of bankruptcy. I'm no attorney, and I'm certainly not an attorney in your state, so I'll probably get something wrong, which I'll update as soon as it is pointed out to me.
Bankruptcy is actually a fairly modern concept, although there are some ancient equivalents, such as the Year of Jubilee described in the Old Testament. Ancient Greece, the Koran, and Babylon all had some provisions for people who could not pay their debts, although, in some parts of Asia, you were beheaded if you went bankrupt three times. But throughout Europe and even after the founding of the United States, people who couldn't pay their debts went to debtor's prison. The last of those was closed in just 1849, although some argue a form of it still exists today when people are put in prison if they don't pay their fines. It wasn't until 1855 that the losses of corporation shareholders were limited to the amount of their investment and 1898 before the US had its first permanent bankruptcy law. Many economic historians cite bankruptcy laws as part of the economic engine on which the US and other countries with similar laws rose, because it allowed people and corporations to take more risks in their lives without fear of debtor's prison or beheading.
More information here:
Financial Gurus Who Have Gone Broke
Bankruptcy Chapters
There are at least six chapters under which bankruptcy can be filed:
Chapter 7
This is liquidation bankruptcy, “straight bankruptcy,” or “complete bankruptcy.” The trustee collects all of the non-exempt assets, converts them to cash, and divides them among the creditors. The bankrupt person walks away with a fresh start and whatever assets might be exempt from the proceedings. A business declaring chapter 7 bankruptcy is going out of business.
Chapter 9
This is for municipalities and is similar to Chapter 11.
Chapter 11
This one is for the reorganization of a business. It allows the company to stay in business for 120 days while trying to work things out. For example, burdensome contracts or leases can be renegotiated; debts can be repaid, reduced, or discharged; and business operations can be rescaled.
Chapter 12
This one is for family farmers with ongoing income and is similar to Chapter 13.
Chapter 13
Chapter 13 is for an individual with a regular income and a desire to pay the debts but without the ability to do so. It protects the debtor from creditor actions—such as lawsuits, foreclosures, wage garnishments, and contact with the creditor. You make payments through a trustee for 3-5 years and then the remaining debts are discharged. It can be useful if you have debts that wouldn't be discharged under Chapter 7—such as tax bills or child support—if you're underwater on a house, if you are behind on payments, or if you have years of unfiled taxes.
Chapter 15
This is used for those in bankruptcy who have debts and assets in more than one country.
More information here:
Will I Be Protected If My Investment Broker Goes Bankrupt?
A Few Thoughts on This Particular Case
I commented to Mary that it seemed kind of silly to file bankruptcy on a physician's salary with just $25,000 in dischargeable debt because it really only eliminated less than $20,000 of it, about a month's worth of physician income. She noted she would do it again given the social situation; mounting legal bills; and mostly, the bank's decision to foreclose on the house (and get a deficiency judgment) rather than do the short sale. Critics will point out that she “didn't learn her lesson” given that the student loans have only been paid down about $5,000 per year since the bankruptcy and that she has a $26,000 car note, so I'll just do it right here in advance. But bear in mind, physicians are doing that stuff all the time, and nobody thinks twice about it.
Post-Bankruptcy Financial Tips
Leaving Mary's case, I'm sure this post will generate a pretty good discussion about high-income professionals and bankruptcy, but first, I'd like to give some financial tips about what to do afterward. I'll leave the decision about whether to file bankruptcy between you and your attorney, but prior to filing it, I would caution you to do all you can to avoid it. As you can see, many of the debts don't go away anyway, and there are serious hits to your credit score, your confidence, your reputation, and your cash flow. To me, “all you can do” means cutting your expenses to the bone, selling everything you can to free up cash, negotiating with creditors, short-selling the house, boosting income, getting family help, etc.
Now, on to the post-bankruptcy tips.
#1 Don't Plan on Buying a House Any Time Soon
Guess what? If you don't pay your debts, nobody wants to lend you any money. Chapter 13 bankruptcies generally affect your credit score for seven years (10 for Chapter 7), although it may not take all seven to recover to the point where someone will give you a mortgage. A short sale isn't as bad. You can often get a new mortgage just 2-3 years after a short sale. But either way, you'll rent for a while, you'll need to pay cash for a home, or you'll need alternative financing (like from the seller).
#2 You Can Borrow Money But Not at Good Terms
As this story illustrates, you can borrow money relatively soon after bankruptcy for things like a car, but you're not going to get a very good interest rate. Doctors often get car loans at 0%-2% but not doctors who just declared bankruptcy. Actually, 10% doesn't seem too bad in that scenario. But given the difficulty of borrowing, it seems a good idea to just not do it at all if it can be avoided. Drive a beater. Cut up the credit cards. Go all Dave Ramsey Gazelle Beans and Rice and just pay cash for stuff. Nobody is going to argue it's a good idea to borrow at 10% so you can invest.
#3 Student Loan Options Are Limited
Like other debt, your student loan refinancing options are going to be limited. If you plan to refinance, you might even try to do so before declaring bankruptcy. (In fact, if you're going into Chapter 7, you might try swapping some of those student loans for something that actually goes away in bankruptcy, because you're not going to be able to refinance afterward.) That's OK. Lowering your interest rate only helps a little. The way you get rid of student loans is to throw thousands of dollars at them every month. Besides, if the issues that led you into bankruptcy aren't resolved, you may be better off staying in the government IDR programs anyway. Of course, bankruptcy has no effect on PSLF. You can get rid of a lot of debt in just a few years after training if you can manage to make 120 payments while working for a 501(c)(3). If you have to change jobs anyway and you made a bunch of IDR payments in training, why not look for a nonprofit?
#4 Max Out Those Retirement Accounts
I'm always telling people to max out their retirement accounts. Obviously, this reduces your tax burden, builds your nest egg, and gets you into the mindset of looking at savings as a bill. But there is another great reason to max them out. In most states, they're protected from your creditors. What a lot of people don't realize, however, is that protection comes from declaring bankruptcy. You actually have to declare bankruptcy, or at least be willing to, in order to get that protection. The asset protection of 529s and HSAs is a little more variable (and uncertain), but it's almost certainly better than a taxable investing account or bank account. Bear in mind there may be some type of “look-back period.” Check with a bankruptcy attorney in your state.
#5 It's Usually Not Just Bad Financial Decisions
Despite what some people think, bankruptcy doesn't typically come just as a result of bad financial decisions. Lenders aren't stupid. They won't lend you money that you're unlikely to pay back in your current financial situation. But what happens is your financial situation changes. You get sick or injured. You get divorced. Your child becomes ill without insurance, and you run up a bunch of medical bills (medical bills are responsible for 64% of bankruptcies.) You lose a job. You have to move, and you're underwater. Then, the combination of bad financial decisions PLUS the new event is what causes the bankruptcy.
#6 But Fix the Bad Financial Decisions Anyway
The likelihood of you making all good financial decisions and then being wiped out by one severe life change is pretty low. There's a decent chance that you'll run into another severe life change in a few years, and if you don't change the bad financial decision-making processes in your life, you may end up right back where you are now. So, let's get the mess cleaned up as soon as possible. Just like a graduating resident, a doctor in or recently out of bankruptcy is one of the poorest people in the world. You're so poor that you had to go to the government to protect you from your creditors. So live like it. No living in fancy doctor houses. No driving fancy doctor cars. No going on fancy doctor vacations. No paying for stuff that rich people pay for, like their kids' college educations, their aunt's furnace, or a private high school. Wealth is not income; income is not net worth.
The car is usually an easy target. A reliable car that you can drive for a few more years can be had for $10,000. You can haul four kids in it. You don't have to spend $30,000, especially $30,000 you don't have.
“But it's not reliable!”
Sure it is. And if it dies (i.e. the repair costs more than its worth), go buy another one. You're still $20,000 ahead and won't have payments.
Vacations? When you're broke you vacation like poor people—you go see family and sleep on their floor. Private school? Are you kidding me? Stuff like that is fine if you can afford it, but there is a public school system and most of us made it through just fine and still managed to get into medical school. How bad can it really be?
If a lack of insurance was the catastrophic event that tipped you over, figure out a way to get insurance. Renter's insurance and umbrella insurance are cheap. So is term life insurance. Health insurance is tough for many Americans but not on a doctor's salary. It just has to be a priority. Disability insurance is important, too, if you still qualify.
#7 Nothing Happens Instantly
Just like a graduating resident with a net worth of negative $400,000, you didn't get into this hole in a single day or a single year, and you're not going to get out of it in a single day or a single year. You're in it for the long haul. But if you make good financial decisions and work hard with your nose to the grindstone, you'll pick up your head five years from now and be amazed at how far you've come.
#8 You Can't Live Like Your Partners
If you're single and broke, you can't live like your partners. I'm sorry. You just can't do it. When I joined my partnership more than a decade ago, many of my senior partners were in a very different financial situation. They graduated from medical school when tuition was under $10,000. Their student loans were long gone—if they'd ever had any in the first place. Some had their mortgage paid off. Several were married to another physician or another high-income professional. We knew we couldn't live like them if we wanted to reach our financial goals. So, we rented. Then we bought a house cheaper than theirs. We tried to figure out ways to boost our income. We stuffed our retirement accounts full. We paid off our debts. We didn't furnish half the rooms in our house. We drove a $4,000 Durango. For years.
But you know what? Now they're asking me about finances, how they can get themselves into a position where they can afford to not work nights or cut back on shifts. Younger partners show up and swap their Audis for beaters.
Like Katie on the knife edge of Steort's Ridge, life after bankruptcy can be a challenging and scary experience.
The point is, live your net worth, not your income.
#9 Remember You Have Expenses Others Don't Have
If you're a single parent status post-bankruptcy, you need to realize you have expenses that others don't have—child care, legal bills, higher interest rates. That means you've got to adjust other areas of your budget to make up for it. You've got to set your lifestyle expenses even lower. But you know what? A late start or a setback like divorce or bankruptcy is nothing compared to the power of a physician's income combined with smart financial decision-making. Living like a resident still works, and nobody is ever really more than about 10 years away from financial independence.
So, for Mary and all the other Marys out there, you're not alone, and this too shall pass. You've been knocked down and maybe even kicked while you were down, but you're in control. You can do this, and the entire WCI community can help.
What do you think? Have you or someone you know been through bankruptcy? What was it like? How did you recover? How long did it take before you really felt like it was behind you? Comment below!
[This updated post was originally published in 2018.]
What do I think? I think that I am human and humans tend to err. I am not going to judge anyone for their mistakes, but – like you – hope that they (and others) learn from them.
My parents had to file for chapter 13 bankruptcy when I was a kid. My dad was fired after a whistle-blowing event as a nuclear engineer where he thought something unsafe was going on. After reporting it and nothing being done, he went over his supervisor’s head. This led to him being fired and black-listed where he was unable to gain employment. So, we spent a year living with my grandparents, declaring bankruptcy, and later on moved once dad finally got a job.
As you said above, we rented for many years. Some of this could have been avoided if my parents made better choices. They didn’t have a lot of an emergency fund set up. Not sure if they even know what that was, and they have always liked to use credit cards (and not for the rewards). This was all in spite of being a high-income earner.
I think avoiding bankruptcy is best, but people make mistakes. I certainly have. I hope that Mary can learn her lesson and teach others about it. Sometimes those are the most powerful stories.
I will add that student loans can be discharged in bankruptcy and I heard three lawyers at FinCon say as much. I’m not a lawyer either, but do know that it can be done.
Thanks to her – and to you, WCI – for being willing to share.
TPP
TPP,
They can directly be discharged? I wonder if people are paying off the student loan with a HELOC or something and then filing bankruptcy?
Student loans generally aren’t discharged in bankruptcy.
In general, student loans aren’t discharged in bankruptcy unless you can convince the judge that you never going to have the means to pay them off. Same with disability – if it’s permanent, yes, if it isn’t, no.
Most courts have found that borrowers do not have to be at poverty level income to prove “undue hardship.” A 2014 court described a “minimal standard of living” as somewhere between poverty and “mere difficult.” A practicing physician ?
It is “possible” but I hope the attorneys provided adequate disclosure. Speaking to an audience at FinCon would lead the fact that even those attending would suggest terrible advice.
Depending on the context of the discussion,
I would evaluate the reliability of any advice from the attorney.
I don’t think that they implied that it was something that they recommended, but they did mention it was possible if in dire straits. That said, this was to an audience of general people (and not specifically physicians).
So, this application was likely slanted more towards people who were not high-income earners.
I’m obviously not an attorney. But found it interesting that they said it, because I’ve always heard that they can’t be discharged at all. The fact that it was a possibility made it worth mentioning to me.
TPP
You’re right it is a possibility.
20 plus years ago my wife left, leaving me with a 9 year old child, a dog, and several hundred thousand dollars in debt. I considered bankruptcy…but feared the consequences.
Pretty much did all WCI suggested….expenses to the bone. Rented out the house while trying to sell it, while the kid and I lived in a duplex. Paid everything I made onto debts except $400 per month, which was food/clothing/gas/entertainment/etc. Worked with creditors, got interest deferred, would save up and offer settlements …many of which were accepted.
I will point out (unnecessarily) that divorce is hell. On the participants, on the kids, on your finances.
Now, net worth well into 7 figures. Life is good.
Not critical of “Mary” at all. Just pointing out that sometimes you can do the negotiating yourself.
Another point..always be careful that those who “help” you may not have your best interests at heart. In your narrative you pointed out Mary’s attorney contacted her. Not knowing all the details…but is it possible that the attorney profited from the bankruptcy proceedings…and if Mary had been able to continue her short-sale negotiation that she might have come out better?
Divorce can be financially devastating and I can see how it started the ball rolling down this path. When I was going through mine I was hemorrhaging money but luckily I was living below my means and could handle it just with cash flow (although when I was handed the divorce decree the one thing that almost wiped me out was that the judge ordered me to pay $100k to my ex within 30 days, money I did not have and had to use credit card access checks to cover it while I had to build up money as my savings had been wiped out by that time.
I can’t believe in this case this whole situation was forced by a bank refusing to work with her for a short sale. It seemed not much else was financially gained by her doing it as you pointed out. Also she didn’t get her student loans discharged which is the norm (I often wondered could you refinance your home or use a HELOC to pay off as much of the student loans as you can if you are contemplating bankruptcy because that would then be able to be discharged (I wonder if there is a look back period for that as well though because it seems like a pretty shady thing to do (racking up credit card debt prior to filing would also be something I wonder if people have done prior to filing bankruptcy)
Do believe it (the bank not working with her). The same thing almost happened to me in 2010. Had a buyer for my short-sale house and I was going to make up the difference with a signature loan….so the bank would actually get the FULL payoff price of the home. They almost said no simply because the lackys working in the mortgage department kept forgetting to mention that there was a signature loan and “corporate” didn’t want to consider short-sales unless they were 6+ months in arrears (we were only one, intentionally, since they wouldn’t talk to us at ALL about a short-sale unless we were behind. I needed the house sold NOW because I was coming out of residency and my salary couldn’t cover a mortgage, rent on the other side, plus my now-in-repayment student loans). It took lawyers to get them to listen and we got out from under the house by continuing to pay an $80K difference…for the next 5 years. Oh…and Hurricane Irene hit the house 5 weeks before it sold & did $20K in damage (raising our insurance rates to $3500/yr for the next 5 years….sigh. Sometimes truth is worse than fiction).
I ought to start collecting these horror stories from residents who bought houses. I think maybe I will. It’ll be a good forum thread.
I have never been anywhere close to bankruptcy so take what I say with a grain of salt. I have read that one mistake that women especially make is wanting to keep the house over financial assets in divorce.
This is usually to protect children from the effects of divorce- my mom worked her tail off to keep my siblings and I in the same house so we didn’t have to change schools , and this significantly lessened the emotional blow of the situation. Each individual situation is different, but I’m sure any mother would do this if it was remotely financially possible.
I know you are a big fan of “beater” cars, as you reemphasized in this post. My wife was recently involved in an auto accident wherein her stationary 2015 BMW 320 sedan was struck from behind by a large pick-up truck and pushed into the car ahead. All airbags deployed and the car was a total loss. She suffered some cuts and bruises and a mild post concussion syndrome, but nothing that required hospitalization or was life threatening. Cars are much safer now then they were 10 years ago. I am not certain my wife’s fortunate outcome would have been the same if she had been driving an older, less expensive vehicle. You need to point this out to people when considering the pros and cons of driving a “beater” car.
This is an anecdote. I also have an anecdote. I was in a similar accident (stationary, hit from rear by small truck, hit car in front of me which hit another car so 4 cars involved in total). My small, cheap kia was totaled and I walked away without any cuts/bruises/consussive sx.
Yes, the beaters you can get now (2005s) are way better than the ones you could get a decade ago (1995s)! I totally agree!
Electronic stability control (ESC) is standard as of model year 2012. Per many studies it’s the biggest safety innovation for cars since air bags or seat belts. For a physician or similarly-paid professional it’s not crazy to get a 2-3 year old 15-20 thousand dollar used car. For a lower-level luxury car you’d even have 1 yr left of original manufacturer’s warranty on a 3 yr old car.
Edmunds true cost to own has a new version of a car to be only about 15% cheaper per year to operate than a 2-3 year old one. My car is a lightly used CPO entry level luxury car that costs about 50,000 to operate over 5 yrs (includes depreciation, insurance, fuel, etc). New it is 57,000 or so to operate. I saved about 15% in annual costs. Your cars were cheaper to operate than new versions of them but N=very small. You also could have had your used Durango blow up within a year and cost more to repair than its worth. Edmunds has the aggregate data. My car has a similar cost of ownership as a new, well-equipped toyota camry for 35,000 new. This 10,000 annual car cost comprises ~25% of my annual 39,000 fixed expenditures. v(in a very high COL area too) I don’t spend much more on variable costs; maybe 1-2,000 if I eat out more or buy a cheap $400 laptop. Having a solid car isn’t a big “rock” when you’re making 140,000-300,000 as a doctor. You also partake in boating which is likely somewhat expensive. Everybody spends their money as they deem fit and whether it is a modest boat or a vehicle that is cheaper than most RN’s drive, as long as they spend the same amount it’s a wash. A newer used car is only about 1,000 max a year to operate more than a “beater” version. All that matters for car ownership from a financial standpoint is cost to operate. Not “no payments” or “better fuel economy.” Newer cars are substantially safer than older ones and offer more technology and features too.
At about year 10 the used car has massively increased repair costs and for a person with high opportunity cost of missing work, non negligibly increased unreliability.
Cars HAVE gotten much safer the last few years. The IIHS (insurance institute of highway safety) has instituted the small overlap frontal crash test for both driver and passenger as well as headlight rating and crash AVOIDANCE tests. All this in the last few years. I wouldn’t get a 4+ year old car since it’s not under warranty.
The sweet spot to me is buying a used car with at least one more yr of original warranty. A CPO car could be fine too.
Isn’t it fun how personal finance is personal?
But I disagree that “cost to operate” is all that matters. Habits matter too, and getting in the habit of financing cars has downstream effects on the rest of your financial life. It’s not that a car loan or even a lease is a big rock for a highly paid doc. It’s that those with a car lease also have a second house bought with 0% down, have the kids in private school, still have student loans, and take fancy vacations.
Good habits for financial health:
1) What you purchase
2) How you purchase
3) How you pay
Good habits for physical health:
1) Eat right
2) Get plenty of sleep
3) Get plenty of exercise
Each individual can benefit from good habits. At a minimum, good habits tend to eliminate needless problems.
How true! One thing I would add is for doctors to stop trying to keep up with. or outpace. the Joneses! Learn to live BELOW your means from the get go and when adversity strikes, at least you’ll have a buffer.
In general, doctors are clueless when it comes to finance and money management. This is a shortcoming of their educational process, which either skims over or totally ignores the fact that Uncle Sam treats medicine as a business!
It doesn’t matter what you “feel.” I stated that cost to operate is all that matters *financially.*
And the aggregate data of thousands upon thousands of data points (maybe millions most likely) shows that used versions of cars are marginally more expensive to operate, about 1-2k a year than new versions of them. For people earning 150-300k NET a year it’s not a big deal.
In fact, it’s mathematically illogical to save up a ton of money while it is losing 3% on average to inflation to buy a car or house with cash instead of financing these purchases with a 2-4% loan.
I wholeheartedly agree that the behavior aspect is important for many people but the numbers don’t lie. I don’t make decisions based on feelings but based on the mathematically correct decision. I opine that most would be well-served doing this. It’s like my friend who got into a very high-paid specialty (400-500k gross) while doing the HPSP. He lost out on hundreds of thousands of dollars doing the military. He decided to do the HPSP based on his “feelings.”
“Isn’t it fun how personal finance is personal?
But I disagree that “cost to operate” is all that matters. Habits matter too, and getting in the habit of financing cars has downstream effects on the rest of your financial life. It’s not that a car loan or even a lease is a big rock for a highly paid doc. It’s that those with a car lease also have a second house bought with 0% down, have the kids in private school, still have student loans, and take fancy vacations.”
How long does it take a doctor to save up for a car? Put retirement savings on hold for two months and you have it.
Where can I find the Edmunds data claiming that new cars are cheaper to operate than a used car? I’ve never heard that anywhere.
I found an Edmunds article from November 2017 that concludes used cars are cheaper to operate over 79 months. The specific example used a compact SUV,
and it was $19k to operate a used SUV vs $24k to operate a new SUV. That’s a 25% difference, so I don’t see how purchasing new would be cheaper if another vehicle was used. (https://www.edmunds.com/car-buying/compare-the-costs-buying-vs-leasing-vs-buying-a-used-car.html)
Has the data shifted by over 25% in less than 1 year?
https://www.edmunds.com/tco.html
Not sure about your question.
Compare costs first three years to years 2-5 may have been the comparison. That’s why I would purchase a two year old versus new.
Not necessarily true. My wife and I are a dual physician household in a lcol area. We are just over 1 year out of residency. We have 2 children. We save 40% of our income pre tax. We have a 15 year mortgage at 2.5% for 500k after we put 20% down 6 months out of residency. We saved 30% of our resident income every year. We max out all retirement accounts and we have 2 car loans. We have the cash to pay them off but at 1.5% interest on both loans for 4 years with total note between the 2 cars being 60k I don’t see the benefit of pulling that money out of a taxable account to pay off both cars with interest rates that low. My truck was brand new and she drives a 5 year old suv. I began reading this website in medical school and it has paid dividends but just because you have a car loan does not mean every other choice you make is a bad one.
Of course all choices are independent.
But you guys make what in a month, something between $30 and $80K? And you’re saving 40% of it? So let’s say you’re saving $20K a month. In two months you could buy a brand new $40K car. In four months you could buy a brand new $80K truck. In two weeks you could save up and buy reliable transportation. There is absolutely no need for you to have a car loan.
So the only question you have to ask yourself is if there is a need to maximize the leverage in your life in order to reach your financial goals. Because even if you have $60K at 1.5% and you manage to earn let’s say 8% on that money, we’re only talking about $60K * (8%-1.5%) = $3,900 a year. What’s that going to move your retirement up by, a month or two at best? And that’s assuming you really do invest the difference, which most people don’t. I just think it’s a bad idea from a behavioral perspective to buy stuff without saving up for it first.
How you purchase the used vehicle is a concern for most. Edmund’s and NADA is a good source for pricing.
I stumbled upon a growing segment in the used car business. Driversselect.com
and Echopark.com
They are owned by a Fortune 500 company Sonic Automotive Inc. (SAH)
The business model is buy primarily leased vehicles at national auctions, run it through inspections and fix . Fix the price “no-haggle”, basically $1k to cover costs (salesman makes $100 per car).
Remaining factory warranty and a clean Carfax with no accidents. If you are missing a floor mat or manual, your out of luck. If you spot a scratch, ask them to fix it BEFORE you buy. Once you buy it, the warranty is with the manufacturer.
Good used car at a good price.
Their profits are on Financing and protection contracts like extended warranty and gap insurance. If you pay cash, you paid $1k for them you buy you a good car at a good price with a manufacturer warranty. These will be stand alone used car dealerships with only late model cars. Some like CarMax buy any car and set prices higher.
Cost to operate needs to be added to purchase cost to be a meaningful comparison.
https://www.edmunds.com/honda/accord/2015/st-200709383/cost-to-own/
Edmunds includes that. By far, the higher depreciation in the first two years is the largest cost.
Appreciate the story. Agree with other comments that there’s probably more going on, but that’s ok, the points are well taken.
I have two uncles who have gone through bankruptcy.
The physician made many of the mistakes on this site, but was able to limp along until he could no longer practice and then it all fell apart, bankruptcy in his early 60s.
The other went bankrupt in his twenties when a business failed. He did all the above things, and despite not having a physician salary he recovered to the point of now (late 50s) being in a $2+ M house and being shocked that I couldn’t come up with $950k in cash to invest in a different house with him (I’m just a humble government employee after all…)
Part of it to me is the divorce (doctor divorces seem to be even bigger cash cows than others), part of it is timing (early career vs late/post career). Big thing is having humility to seek help when needed and understanding that it is recoverable. For us in medicine, we all lived poor for 7-10 years through training, just have to do it again.
Very sobering story. Just a reminder that these things can happen to physicians too. Your post-bankruptcy tips are solid, and can also be applied so you don’t go into bankruptcy in the first place.
Excellent post and I commend “Mary” for her willingness to share. Those of you interested in this topic may find Dirk Cotton’s blog post interesting. Although focused on bankruptcy during retirement, it has broader appeal. Additional posts referenced in the article are also worthwhile. A link is below:
http://www.theretirementcafe.com/2016/01/why-retirees-go-broke_8.html
Thanks for sharing. Good post.
Yikes! It can really happen to anyone. I hope most followers of the WCI Network are prepared for the big ones. Job loss (have an Efund) , Disability (have insurance), and Divorce ( Help me out here??).
Not sure how to prepare for divorce other then continue to be a good spouse and make time for each other and try to avoid it altogether.
This really shows that having your financial house in order first can help protect you if disaster strikes.
Divorce is not unavoidable. Invest in your marriage from the beginning to the end. Get into couples therapy before it is too late! I have seen many successes from couples therapy IF you get into it EARLY. I have also seen enlightened couples get into couples therapy before marriage just to make sure all is well and they are on good paths of communication.
Mary was caught in a “liquidity event “ that was triggered by her divorce. She made her choices and worked it out. Bankruptcy and it’s lingering impact s will pass with time. The solution she chose was based upon emotion most likely.
From a financial point of view, “hard money” might have been available but at a cost.
Emergency funds, highly liquid is one technique.
I would suggest in building weath, most here focus on the before and after tax return benefits. House, Roth,IRA’s , rental properties and vacation houses.
Consideration should be given to “having a backup for a liquidity event. Normally, a brokerage account invested or CD’s rather than property or retirement plans.
I agree that divorce devastates all the lives it touches and it is hard to look at the speck in Mary’s eye without looking at my own. Sometimes our decision making ability becomes compromised in times of extreme stress. Seeking the best council to navigate these waters is key but we often fall prey when we become vulnerable. I love the story of a “fresh start” which psychologically releases all the stress which allowed her to get back on track.
The lesson taught here comes from the boyscouts motto, “be prepared,” even if the subject is as uncomfortable as divorce. One my peers has all their assets separated in such a way that they could part ways without too much hassle but this would be the exception. With divorce at an all time high, should we be prepared for such an event?
Divorce rates at an all time high? Any evidence for this assertion?
Millennials are getting divorced at a lower rate than previous generations. Overall divorce rates appear to be going down, not up. See https://divorcescience.org/for-students/graph-of-us-divorce-rate-1887-2009/
So in the best case scenario one out of five will be divorced. It seems to be a significant risk.
I do admit, it’s alot better than 50/50!
This story makes me queasy because I’ve known physicians who were wiped out by a spendthrift spouse, divorce, investment losses, lawsuits, health problems, or buying a house at market peak.
I could claim that through great skill and care I avoided those things, or I could be honest and say that I have done most things WCI recommends AND I have been lucky (thus far.)
I guess I just dont see how bankruptcy was the best option here. Sometimes its the option, but makes no sense here, nothing was really gained except a minimal amount of CC debt, and yet it will cost more in interest due to the black mark on here credit forever.
We all make mistakes, I know I’ve made almost all of them.
The best thing to do would have to allow the foreclosure to happen. Foreclosures take forever and you dont pay the mortgage or anything, which you can put to other uses (settling the CC debt, emergency fund, new place, etc…). It sounds like she got terrible advice all around, and its very hard to make sound decisions in such emotional times, but man this is rough.
I agree with the advice to not take the house in the divorce, its an expensive anchor.
Agree.
Mary was in an unenviable position but it doesn’t seem like bankruptcy was the best of the several bad options. In a choice between foreclosure and bankruptcy, I’d choose foreclosure as it stays on your credit report for 7 rather than 10 years.
As I understand it, a major benefit of chapter 13 bankruptcy is that you may be able to keep your house through refinancing . In thIs case, Mary lost the house and entered bankruptcy. The 20k in relief is likely outweighed by attorney fees and higher future interest rates.
Good comment Zaphod.
When faced with time sensitive decision and the stress of it all I’m sure it was a terrible predicament to be in. Good point to just stay in the house while foreclosure proceedings happening. Save up the paychecks and land on your feet in a decent rental in the same school district. hopefuly without the kids feeling the stress but just coming to grips with the change.
Excellent post and discussion. A thank you to Mary for her willingness to share. Bankruptcy is not an easy solution, but it can allow a person to restart their life. I hope Mary can reboot her life. I have known several physicians that have file for bankruptcy during their careers. Some were able to turn their lives around and others continue to struggle. The underlying cause of the bankruptcy usually was bad business deals, divorce, overspending, or personal disability. I have never personally known a physician to file for bankruptcy because of malpractice liability. I’ve read about anecdotally cases of malpractice related bankruptcy , but these seem to involve either flagrant malpractice or criminal behavior.
“medical bills are responsible for 64% of bankruptcies”
That is a jaw dropping statistic!!
Do you mind sharing the source?
https://www.thebalancemoney.com/medical-bankruptcy-statistics-4154729#
There seems to be a missing piece in Mary’s situation. I imagine it was really stressful, but it’s hard for me to see how this was the best outcome.
RE: bankruptcy and personal finance in general. One night my father in law was feeling chatty and I was feeling inquisitive. He’s a baby boomer in his late 70s. One of nine children to reach adulthood. He’s comfortably retired.
We ran through his eight brothers and sisters and their financial lives as he understood them. And my takeaway was that it all came down to character. Some of them made a lot, and spent even more, and ended destitute or bankrupt. Others made a lot and saved a lot and did really well. A few made a little and saved adequately and are comfortable now.
Anyway, it seemed like over a long enough period whether someone had a high income or experienced a setback didn’t make much of a difference to whether they were able to retire comfortably.
That’s why I used the word character–even though the moral connotation of that word makes me uncomfortable. But the ones that made generally made good choices generally had good outcomes, even if they experienced an early bankruptcy or setback.