Suze Orman Councils Clients on the Perfect Time to Steal $70K
Well, you can praise someone one minute, and have to harshly criticize them the next. On the Suze Orman show, Suze advised a highly indebted guest to declare bankruptcy on approximately $70K of credit-card debt. Telling him about the legal benefits of declaring bankruptcy, she went a step further and asked him to tell at least 10 of his friend's that he was declaring bankruptcy, and to be proud of it. Unbelievable. Here's my overview of the episode, and my commentary.
Suze Orman's Motto's
First, here are some of Suze Orman's mottos, all of which are worthwhile:
- People First, Then Money, Then Things
- Self Worth Equals Net Worth
- Truth Creates Money, Lies Destroy It
An Oveview of Mark's Situation
Orman claims that credit-card debt occurs when we want to please other people by doing things for other people, which is really hyperbolized when we're in a relationship.
Mark is not currently in a relationship, but he was in several relationships with women, during which he racked up credit-card debt. Wanting to please his girlfriends, he would spend lots of money on them, which got him into credit-card debt. Prompted by Orman, Mark reluctantly said the reason that he's in such a large amount of debt is because he tried to help out with his ex-girlfriend's, one of whom was going through a divorce.
Having heard that, Orman asks Mark if he feels that it's the other people's fault that he has. Orman explains that if he hadn't been with his former-ex's, he wouldn't have been in any debt. Prior to these relationships, Mark didn't have any debt; after getting into the relationships, he spent money trying to please these women, after which they left him. After that, Mark started using the credit-card for himself, to fill up the natural emptiness that occurs after breakups. Now, Orman notes that individuals try to find fulfillment with the things money can buy, but that such is hollow.
Now, Mark would like to clean up his situation: get rid of his credit-card debt and start saving for retirement. Lets take a look at Mark's credit-card debt:
Card APR Owed MBNA 22.98% $21K Discover 14.99% $9.8K Discover 14.99% $8.6K CitiBank 14.90% $12.8K Cap One 14.90% $728 Chase 13.24% $2.9K Visa 12.90% $4.9K First USA 11.90% $5.5K Credit Union 6.0% $2.8K Net -- $69.03K
Mark hasn't been paying off any of his credit-card debt for two years. He owns no real-estate, has very little money in a retirement account, and does not own a car. Since Mark only makes $50,000 a year, his credit-card debt is larger than his annual income.
Suze Orman's Advice
Orman refers to a common rule of thumb: when you make less than what you owe, you are already bankrupt, because it is "impossible" to ever pay down that credit-card debt. Thus, Orman suggests that if there is ever a time to declare bankruptcy, now is the time for Mark. Suze tells Mark that he should not worry about what other people think about him because he declares bankruptcy, but should consider how it wouled make him feel.
Since Mark hasn't been paying off this debt for 2 years, his credit-report is already ruined; he isn't going to do any more damage to his credit-report by claiming bankruptcy. The advantage of declaring bankruptcy is that his creditors cannot legally come after him; e.g., cannot send him letters orgarnish his wages. Because his credit-reports are already ruined, it would take just as long to fix them without declaring bankruptcy as it would if he did declare bankruptcy.
Orman says that it is Mark's self-destructive nature that allowed those women to take advantage of him. Orman then claims she doesn't suggest her clients declare bankruptcy lightly; she even says it is inexcuseable to claim bankruptcy twice (most people that claim bankruptcy once claim it twice).
Casting Mark in a positive light, Orman talks about Mark's history: Mark was robbed twice and during one of those robberies, he was shot at. Orman tells Mark to tell 10 people, who are his closest friends, that he's going to claim bankruptcy. Orman wants Mark to jubilantly yell out that he's going to claim bankruptcy, and not only that, but also to be proud of it.
Analysis of the Morality of Declaring Bankruptcy and Natural Law
As you might be able to guess, by the end of the interview, I was about ready to regurgitate. Proud to declare bankruptcy on $70K of debt? Why don't we tell successful bank-robbers to be proud that they've gotten away with stealing? That's exactly what this is. Declaring bankruptcy is morally no better, and would be no different under natural law, than stealing $70K from the facilities of the credit-card companies.
Furthermore, I'd have to argue against the "rule of thumb" that Orman states. Since this guy makes $50K a year, and has $70K in credit-card debt, he can start paying down his debt; it's just not going to be easy. How much money does one need to "survive" in the modern world? Well, I don't know the precise answer, but I do know that graduate students in pHD programs survive on around $20K a year. If they can do it, so can anyone else. That leaves $30K for Mark to pay off debt each year. He could pay off the entire balance on his MBNA card and the entire balance on one of his Discover cards. That would knock his current debt down to about $38.23K, which would grow to $43.37K by the next year. Again, the next year, he pays down $30K of debt, paying off the highest APR card, which reduces his net debt to $13.37K.
Mark's situation is hardly "impossible". It is very difficult. Doing the right thing isn't always easy, but one always has the choice to do the right thing. Furthermore, he can negotiate with these credit-card companies to get exceptions to the annual interest rates, or even get some of the debt knocked off. A credit-card company would rather get some of its money, or get all of its money at a smaller profit than get none of its money. So, what's the deal with this "rule of thumb" stuff? Well, this is really a "rule" for when it is financially better for you, personally, to declare bankruptcy. In other words, it is a rule for when it is financially beneficial to steal.
Furthermore, I must comment on Orman's attempts to justify this suggestion and make Mark seem like a sympathetic and likeable guy: namely, they are irrelevant. The fact that Mark was stolen from and shot at doesn't give him the right to steal from other people. I was robbed of $20 at gunpoint; that doesn't give me the right to steal $20 from anyone. The fact that Mark's ex-girlfriend's took advantage of him also doesn't give him an excuse to steal. He had a choice: either to buy many expensive things for them, or not to do so. People always have a choice. Even if someone has a gun to your head and is telling you to kill someone else, you still have a choice. Again, it isn't always easy to do the right thing; in fact, a lot of the time, it is very difficult to do the right thing. I must also state that the attempt to shift blame for Mark's action from Mark and to his ex-girlfriends is about as convincing as "she told me to do it"; a modern reoccurrence of Adam blaming Eve because he ate the Apple of Knowledge, simply because she encouraged him to.
Declaring bankruptcy is both immoral and criminal by natural law: it constitutes the initiation of aggression against the shareholders of credit-card companies. The morality of the entire situation can be clarified and easily understood if we instead stipulate that Mark owes $70K to his best friend, or his brother, and reflect on our emotional response to refusing to pay a debt owed to a close friend or family member.
Praxeological Analysis of Bankruptcy
It should be unsurprising to Austrian economists and libertarians that bankruptcy is extremely common today. Why wouldn't it be? The State is subsidizing bankruptcy; as anyone who's read the works of Austrians knows, when you subsidize something, you produce more of it, whether it be bankruptcy, obesity, poor health, poverty, or crime. How does the State subsidize bankruptcy? Precisely by allowing it! You go to court, and all of the sudden, your creditor's can't pursue you anymore asking you to pay the money you owe. Aside from allowing this highway robbery, the State subsidizes the costs of defaulting on one's debt. Credit-card companies cannot consider your credit-history more than 10 years ago. Let's clarify exactly what's going on here: the State is telling credit-card companies that they have to loan their money to people that they otherwise wouldn't loan their money to, if they could consider the time-frame that they wanted to consider. This is also highway robbery. It gets even worse than that, though. Those declaring bankruptcy don't even lose all of their assets to their creditors: the money in their 401K plans, 403B plans, RothIRA's, and Traditional IRA's is shielded from their creditors (provided that they were solvent when they made the contributions to these plans, and provided they weren't doing it as part of a systematic plan to defraud creditors).
Thus, given the enormous subsidization of bankruptcy -- and other kinds of financial irresponsibility -- by the State, it is completely unsurprising that there is lots of financial irresponsibility and bankruptcy. It is also completely unsurprising that the same people tend to declare bankruptcy again and again: the naturally irresponsible have less motivation to change their ways if they can declare bankruptcy over and over again.
The State also subsidizes other forms of financial irresponsibility, which lead to higher rates of bankruptcy indirectly. As Suze Orman herself documents in The Road to Wealth (an overall good book for financial advice), there are numerous ways in which the State subsidizes financial irresponsibility. Many restrictions are placed on collection agencies: they cannot demand immediate payment, as that violates the Fair Debt Collection Practices Act; they cannot call you frequently, call before 8AM or after 9AM, call you directly if they know you have an attorney representing you, call you at work if they know your employer prohibits such calls, and cannot call your friends, neighbors, or the people you work with to reveal your financial criminality and immorality; they cannot obtain information on your whereabouts from government records. Finally, if collection agencies do these things, you can actually sue them for demanding that you repay your debts. Most atrocious of all, there is a statute of limitations on credit-card debt: if you stop making any payments on a debt, and manage to slither away into the night and avoid the credit-card companies for a certain number of years (varies from State to State), you're off the hook!
Can anyone feign shock at the consequences of these types of policies? They encourage people to act immorally and criminally by natural law, and to find ways to avoid doing the right thing. They allow individuals to externalize the costs of their irresponsible behaviour onto the credit-card companies and fellow debtors. Interest rates on credit-cards would be lower, ceteris paribus, if not for all of these regulations transferring wealth from creditors to irresponsible debtors. Ceteris paribus, there would be less bankruptcy and less financial irresponsibility if the State stopped subsidizing those things.
Suze doesn't view these with the same scorn that I do, because she thinks of them as helping her clients. She should know better. Indeed, by even telling her clients about these things and encouraging them to use them when appropriate in her books, she is encouraging financially irresponsible behaviour by telling people how they too can misbehave and get away with it. I assume the quality of character of those reading this article is such that I am not doing the same.
Returning to Suze Orman's Mottos
While I agree with Suze Orman's mottos, I certainly think her advice on this situation is flatly contradictory to those worthwhile mottos. Stealing from creditors isn't putting people first: it is putting yourself first, and to hell with everyone else. How can one have self-worth if one runs away from and hides from the natural consequences of his actions? And it hardly seems truthful and honest to default on one's obligations.
Comments (18)
So did she explain why this person should be proud to declare bankruptcy? I assume it was an attempt to help with the poor guy's self-esteem?
Published: October 25, 2004 8:40 AM
Nope, didn't explain why. Also, I made a mistake in my calculations, because I didn't consider taxes (although I don't know if the income he gave is pre- or post-tax). Assuming he gave his pre-tax income, after taxes,a significant portion of his income would be gone. In that case, he'd certainly have to negotiate with credit-card companies to get the APR's knocked off. Again, companies would rather have some of the money paid them than none of the money owed them.
Published: October 25, 2004 9:18 AM
Do you feel the same way about Corporations filing bankruptcy?
Published: October 25, 2004 10:15 AM
Marion,
Of course. In the case of corporations, we also have problems with the fact of shareholders not being liable for debts. Also, corporations and individuals could require contract signing when doing business or taking out loans that would limit liability; whether or not such would be a good idea would be something to be determined by the free market.
In the case of corporations being so poor that shareholders are liable for debt, it is possible that shareholders could sue the executives for violation of contract; anyone who runs a company so poorly as to send it into bankruptcy and causing a liability to the shareholders is clearly incompetent and/or malevolent.
Published: October 25, 2004 10:22 AM
The root of bankruptcy lies in the idea that force has been allocated to the State, and it does its best to regulate between parties as they prevent either party from using force against each other. If the borrower refuses to pay, the lender cannot use force. This leaves the State as the de facto ruler over the property in question as the force lies with them.
Even in the past the this was true, but the State stepped in and set-up debtors' prisons and used force against the borrower until they 'made good' to the lender (usually interested parties had to labor to provide the means to free their loved one - work houses allowed the debtor to try and work off their debt). Today, as credit has been prostituted by the State, and property rights have blurred to point of near non-existence, it is no wonder that the State now uses its force against the lender instead of the borrower.
It really just boils down to allocation and the State's self perceived role. With a State permissive in its allocation theory, subsidizing non-producers by the labor of the producers, its no wonder we have liberal bankruptcy laws. If taking from A and giving to B is allowed within their credo, the State isn't going to make much of stand if A voluntarily gave to B under contractual terms which ended not being fulfilled.
Published: October 25, 2004 11:48 AM
Considering the size of the US Debt, they should follow Suze's advice.
Where I take exception is that the Creditors know the rules of the game too, so ought to be far tighter in lending if there is a good chance they won't collect. Instead they have a default risk derivative and package a bunch of credit card receipts to unsuspecting investors.
At some point, probably recently, someone noticed that they were giving N thousands of dollars on a new credit card to someone with an income of X and debt of X+t. Yet they lent it. It is hardly a fraud against the creditor - the creditor might be stupid, but ought the state protect against that too (ok, remembering the S&L Crisis...)
Of course people buy T-Bills, and Fannie Mae paper too, just as they bought Enron and WorldCom bonds.
Published: October 25, 2004 2:59 PM
tz,
When you accept a credit-card, you agree to certain terms, one of which is to pay the minimum required payments every month. If you don't do that, then you are defrauding and stealing from your creditor.
Published: October 25, 2004 4:33 PM
"Whose picture is it on the fiat which I am holding? It is Caesar's. Therefore render Caesar's fiat unto those whom Caesar decrees to be Creditworthy."
When they had heard these words, they marvelled, and left him, and went their way.
Published: October 25, 2004 8:37 PM
P.S. Living on only 20k per year? Most of the PhD students I know are so studly and smooth with the ladies, I assumed they were making money as gigolos in their spare time.
Published: October 25, 2004 8:39 PM
I don't feel a bit sorry for these credit card companies that lend so much money to people like this guy. they know a given percentage of what they lend will end up uncollected so there is no force or fraud here. give me a break.
when you sign up for a credit card you agree to make monthly payments OR ELSE. this guy chose OR ELSE, and anybody who lent him money after he failed to pay one creditor is asking for trouble. let's use our common sense here as well. the life of the law is experience, not logic.
Published: October 25, 2004 8:56 PM
I don't feel a bit sorry for these credit card companies that lend so much money to people like this guy. they know a given percentage of what they lend will end up uncollected so there is no force or fraud here. give me a break.
when you sign up for a credit card you agree to make monthly payments OR ELSE. this guy chose OR ELSE, and anybody who lent him money after he failed to pay one creditor is asking for trouble. let's use our common sense here as well. the life of the law is experience, not logic.
Published: October 25, 2004 8:57 PM
I agree that Orman's advice, as presented, is unpalatable. I also agree that bankruptcy laws are the kind of dangerous law that the modern democratic welfare state will effectively use to control property.
Having said all that, I can see Orman's advice is sound on the basis of pure computation. The rules are known in advance and the calculation made is akin to comparing what your time is worth to what the probable parking ticket will cost. The real issue here is what happens to a society when people are told to be proud of this kind of behaviour, or are required by their job to advise people to make such calculations.
Consider the management of a company on the verge of bankruptcy: they can liquidate everything, fire the workers and pay off all their debt leaving the shareholders with nothing. Or they can go the chaper 11 route and save the company at the creditors expense. If the latter route is available, and the management takes the former one are the shareholders justified in suing the management? (assume that this is new management brought in after the last bunch got the company into its present shape). If you think they ought to, then isn't Orman, as a financial advisor, obligated to show the bankruptcy route?
It seems to me that once the law enters the picture and once we start seeing the law not our moral convictions as the only constraint on our behaviour, the picture blurs beyond what simple anologies to theft and fraud would adequately capture.
Published: October 26, 2004 12:26 AM
David:
Let me play Devil’s Advocate.
The actual contract(s) between the borrower and lender were entered into subject to State and Federal Law. In the event of a default, the lender is only entitled to the recourse and remedies provided by the contract. (In this case, “one pound of flesh, no more or less, and not one drop of blood!�).
Are you saying that the parties have no right to enter into a contract that, under certain circumstances would violate natural law?
Why in this case does one party have the right to impose, ex post, natural law?
If we allow this, why not allow the borrower the right to void the contract, ex post, on the grounds that it violates Islamic Law?
Why not allow the borrower the right to void the contract, ex post, on the grounds that usury is a mortal sin in the Roman Catholic faith?
On economic grounds, I claim that the market takes care of this situation by assigning a (huge) premium to the credit risk implicit in granting unsecured debt.
Furthermore, most credit cards are pooled packaged into Collateralized Debt Obligations (CDO’s) where different tranches are assigned different priorities for receiving principal repayment and interest and for the assignment of losses due to defaults. On some deals, the junk bonk rated Interest Only (IO’s) and the sub-prime tranches take on most of the default risk. The senior debt is typically protected from assignment of defaults below a certain level. In this way, different investors can choose different tranches according to their risk preference. Do you contend that under natural law that these investors have no right to contract based on risk preference?
Incidentally, the IO’s lose not only when loans go into default, but also when loans prepay. So, if I suggest that our debtor payoff the highest interest card, this is (almost) as bad for the IO’s (and servicers) as if he declared bankruptcy!
If you don’t agree, please find me an investment where I can make a 22.98% APR return on a $21,000 investment, WITH NO RISK. I figure that after 30 years, my investment would be worth $19.4 million and after 40 years, $189 million! :-)
Published: October 26, 2004 11:29 AM
I can be morally bound by whatever terms of the credit card agreement, but the law is what statute and courts say it is. Nor can I typically negotiate with the credit card company. Even in cases of identity theft, they often keep trying to collect from the innocent party and trash their credit rating because they don't check.
I'm merely pointing out that if property laws are weak, the nominal owners need to be more cautious. You are saying that I am bound to an agreement - I simply note that that law says there is a procedure for breaking it, and the creditor ought to take that into consideration. Same with liability laws when selling products. This might not be an ideal situation, but it is stupid not to recognize reality - even unjust reality.
There is no "until you become emotionally unfulfilling do we part" in most marriage contracts, yet divorce is all too common and has far worse effects on society (much less the broken families) than bankruptcy, and is a violation of an agreement which is more sacred than creditor/debtor. Yet divorce too is part of law and often easier to obtain than bankruptcy.
Published: October 26, 2004 3:51 PM
One small note - the Catholic teaching on Usury (particularly in a market economy and in a republic with the rule of law) is a bit more subtle than simply not to allow lending at interest.
(the following is my own take, but I would invite people to do their own research since it is probably "not what they think it is").
The normal application is a sin against charity where someone in trouble (e.g. someone gets a disease that requires expensive treatment) needs money, but those who should give don't and the only alternative is a creditor who instead of charity or simply not lending to what would be a bad debtor instead intends to make him his slave.
Either our liberty is inalienable (a trust we guard and exercise but don't "own" so can't sell), or it can be impaired by owing property. We dropped debtors prisons, and I don't think that impairs contracts so much as it recognizes that human dignity - which includes rights to life and liberty trumps debts.
Published: October 26, 2004 4:00 PM
I saw the episode you are referring to, but I disagree with you for various reasons. The number one reason is that all of the credit card issuers would have sold his charged off accounts long ago, so it would be impossible to pay back the original lenders at that point. Any money paid would go to the collection agencies, that would have previoiusly paid pennies on the dollar for his debt. Also, if you end personal and/or small biz bankruptcy protections, you would stiffle entrepeneurship in the US. Most small businesses are started on borrowed money, many times on the founders personal credit cards. If bankruptcy wasn't an option, you'd stiffle the spirit of entrepeneurship that makes this country great. Countries that make it harder to declare bankruptcy have lower levels of entrepeneurship than the US. Many successful entrepreneurs failed many times before succeeding. That is why the interest rates are so high on credit cards and small biz loans...they expect defaults on a certain percentage of the loans.
Published: August 12, 2007 12:33 AM
I get what your saying about Orman's "immoral" advice, however her job is to inform people how they can better their own situation and if bankruptcy is the best answer for them then that is what she should tell them. She can't claim to be looking out for people's best interest if she is looking out for some company's best interest first.
Published: November 17, 2007 9:16 PM
Please, I do not feel bad at all for these credit card companies. The truth of the matter is based on the interest, they make double of what you orginally bought from the begining, and if you are late on one payment, they will up your interst over night. More people then expected are filing for bankruptcy and these credit card companies don't care, once you file, within one month you are getting letters from them again pre-approving you for a credit card, and most of the time you are approved. Her advise was perfect, this man would have never crawled out of this hole. The truth is as long as we have a Congress we will always be able to declear bankruptcy, and rich people do it all the time. So for a man who owe's $70,000 and only makes $50,000 give him a break. We all deserve a second chance.
Published: January 16, 2008 7:22 PM