How Cognitive Biases Lead You Towards Bankruptcy

How Cognitive Biases Lead You Towards Bankruptcy

The term cognitive bias defines an error in decision making or reasoning. This means disregarding an accurate, as well as, objective information in favor of subjective preferences and believes. In other words, people exhibit cognitive behavior when they go with their gut feeling, and overlook the objective information that is essential for the smart decision-making process. Adding to this, such persistent irrational behavior or bad choices can lead you to bankruptcy. Let’s have a look at the examples of cognitive bias.

  • Sunk Cost Fallacy

Sunk cost fallacy means that your decisions are tainted by the emotional attitude. The more you feed your mind for emotional decision making, the harder it becomes to abandon it. To avoid bankruptcy situations, one needs to make a rational decision with emotional intelligence. Therefore, the frequent cognitive bias which is usually visible in bankruptcy practice is the Sunk Cost Fallacy. In which the client normally refused to surrender an expensive house or car because they have put a hefty amount into that asset. Also, surrendering that asset means throwing away their money. Obviously, in crippled financial times, the sane mind says, that, you need to re-evaluate your situation and analyze what you can comfortably afford and what you cannot. Further, if you are considering bankruptcy then you need to fight against the sunk cost fallacy. There is a famous saying, that: “don’t throw your good money after bad”, which is a right approach if you are struggling with a sunk cost decision.

  • Framing Effect

Yet another example of cognitive bias is called “Framing Effect”. In which people responded to multiple choice in different ways depending upon how it is presented, either as a gain or as a loss. A case in point is when a salesperson utilizes selective facts to tempt their customer to make a purchase, which they really don’t need. Some slick salesman used the framing effect to convince their potential customers that they will save tens of thousands of dollars on their vacation by buying a timeshare in Orlando in comparison to the cost of staying in a hotel for a unique vacation, every year. After making the said purchase they are bombarded with multiple maintenance fees, which eat up their savings. Families who are victims of this framing effect still stuck with multiple timeshares. Besides this, some aggressive salespersons force a customer to make purchases on things they don’t need them such as carpet shampooing system, solar panel installations or water purification systems.

How Bankruptcy Can Help Undo Bad Decisions

In a nutshell, there are many more cognitive biases, identified by the experienced psychologists, which can lead you towards bankruptcy but you get the picture. There is no doubt that anyone can fall prey to lapses in judgment, though we need rationalization in the greater interest of ourselves. But, if you are unable to pay for your basic necessities like clothing, food, and shelter because the disposable income is allocated for the payment of housing and transportation. Then, in such a scenario, payment of non-necessities like timeshare or water purification system is not a good idea, and need of a bankruptcy lawyer is a must. A Detroit bankruptcy lawyer can save your financial condition by taking you out of the bad deal as well as poor decision making. Last but not least, it can help you in regaining your peace of mind.

Detroit Bankruptcy Lawyer- Michigan | Review Of Chapter 7 Bankruptcy

Chapter 7 Bankruptcy Review -Detroit Bankruptcy Lawyers

Chapter 7 bankruptcy is the most popular type of bankruptcy. It is also referred to as liquidation bankruptcy. This type of relief clears out your debts with only a few exceptions: child support, student loans, and taxes within the last 3 years. It can be filed by either one person or by a married couple. From filing to discharge, it takes approximately 4 months to wipe out the debt.

When compared to Chapter 13, Chapter 7 bankruptcy is the most common bankruptcy filed by most married couples and individuals. The cases received under this type of relief are classified as either consumer debt or business debt. Between these two, consumer debt is the most common and includes debts such as credit cards, mortgages, personal loans, medical bills, taxes, and vehicle purchases. Business debts on the other hand refer to debts that occur out of business operations or business ownership.

If the client debt falls on consumer debt, then it is a requirement that he or she must go through a credit counseling class before filing the petition and a debtor education class before they can receive a discharge. Various federal agencies have been given the role of carrying out the counseling and have been approved by the US Trustee.

The various aspects that are covered by Chapter 7 bankruptcy may seem complicated but detroit bankruptcy lawyers will help you to understand each of the steps and requirements.

Before the case is filed, the attorney prepares the bankruptcy documents. The client is required to disclose all their assets and creditors. When the case is filed the bankruptcy court will send out notice of filing to all the creditors listed in the bankruptcy.

Under Chapter 7 bankruptcy, clients will not lose their possessions. The bankruptcy code protects some of their possessions such as household goods and furnishings, jewelry, books, and clothes. The client should disclose all of their possessions even if they think they have no value. They should understand that everything they own is an asset and therefore must be listed in the bankruptcy. These things will be exempted and protected in the bankruptcy.

Once the bankruptcy is filed, the court schedules a 341 Meeting of Creditors. This takes place about 30 days after the date of filing. It is very painless and takes about 5 minutes. The client, the attorney, and the trustee sit at a table and the client verifies their social security number, that they signed the documents, and that their assets are what has been listed in the bankruptcy. The trustee may also ask any additional questions they have regarding the bankruptcy paperwork. While this is called a Meeting of Creditors, it is rare that any creditors appear.

After the 341, the court has to wait two months to allow for any creditors or the trustee to object to the debtor receiving a discharge. In the rare case that this happens, our experienced bankruptcy attorney can help you through that and help you receive a discharge.


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Instead of price shopping your attorney shop their EXPERIENCE. Look for an attorney who has been doing BANKRUPTCY for at least 11 years. Why 11 years ? Because they know the law before and after the changes made in 2005. You need someone who KNOWS what they are doing, without question.

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