> The banks lent money they didn't have.

I don't get this. Banks must always do this, they exist because everyone else wants to lend short term or borrow long term. Anyone who acts as the counterparty to that is automatically a bank or bank-like.

I guess what you mean is that when the banks borrowed short term (as they must), they did it using home loans as collateral, and that more of those loans defaulted than was expected.

How does that justify defaulting?

> I guess what you mean is that when the banks borrowed short term (as they must), they did it using home loans as collateral

But that's not really what happened. Banks made a lot of poor quality loans, then packaged them up and sold them on, taking a spread in the process. Some banks (e.g. Bear Stearns and Lehman) kept some of that risk on their books, but others (Goldman) didn't.

This wasn't a case of banks using their mortgage book as collateral, it was banks originating and actively marketing a dangerous product. It's also worth noting that some banks knew that the products they were selling were low-quality and likely to default.

Then the US government stepped in and propped up the instigators of the crisis. People who made poor borrowing decisions had a part to play in the crisis too, but I think it's fair to argue that the pain could have been distributed more evenly.

Under the circumstances, I can see why it might seem fair to walk away from an obligation like the author's mortgage.

Neither Bear, Lehman nor Goldman 'make' loans. They created CDOs,CDSs,MBSs and sold them to other credited investors.

Yeah, fine - that's a simplification. They bought third parties' loan books and securitised them. But it was that flow of money that encouraged the bad lending practices. If you know you can make a crappy loan and sell it on to Goldman for a profit, you'll make the loan.

On a basic level, yes, banks need to lend money. But saying more defaults came in than were expected is a vast understatement. Banks lent so much money, and were so exposed to risk, that any market correction could have, and did, destroy well established financial institutions. I mean, we're talking razor thin protections from financial ruin basically predicated on the need that housing must always go up. It is literally insane levels of over exposure - not just small leverage to help build a small housing community.

How can you expect people to not default in a system endemic with corruption and rife with irresponsibility?

The way to look at defaulting is the way the bank would. As a business decision. The bank wouldn't bother justifying themselves if they walked away from a deal, they would just pay the penalty and move on.

The author pointed out that his mortgage was a recourse loan.

Bankruptcy only lasts 7 years on your credit, and would’ve wiped all of his debt clean (save for government backed student loans). He’s been stuck in limbo for 10. It’s rare for lenders to pursue recourse when the borrower is insolvent.

In general, yes -- the luxury car in the drive was also bought on credit and is underwater and/or is a lease, and you can't repossess poorly chosen tattoos. Thinking you have a moral obligation to a bank is a fools errand, because they'll happily screw you for a penny.

As the article points out, however, the author was gainfully employed elsewhere. So in this case, the threat of recourse was quite real.

You can still declare bankruptcy while gainfully employed. Some states have much stronger protections for borrowers from creditors than others.

I don't understand why we're going around in circles on this, but the author could afford to make the payments. According to him, the net cost was approx 60k over 10 years, split between the price to buy his ex-wife out and the after-rent operating costs. I don't believe bankruptcy courts are going to help with a payment this person could make without particular difficulty, even if it comes with plenty of regret.

We’re going in circles because I’m providing advice from experience, but I don’t think you have the same experience in navigating contract law to shed debt.

So my impressions were formed by spending a lot of time on credit card forums and reading perhaps several hundred bankruptcy stories over the years. Does chapter 11 -- or even 7 -- regularly help with debts where someone has a well paying job and can afford the payments on a house, but no longer wishes to? Because that, specifically, is where the author was.

I don't disagree at all that anyone in debt to a bank should use every avenue open to them, just as the bank will.

Needless to say, if you try to declare bankruptcy while being able to meet all required payments, that will simply result in having a court judgement to pay those debts.

Which is why if you need to move for work but can’t afford your mortgage, you move and then default, showing you couldn’t be gainfully employed and service all your debt and new housing expenses. The court isn’t going to force you to move back into your underwater property and leave your new job.

Well sure, but you'll have 80% of wages confiscated for up to 5 years. And you'll be unable to get another mortgage for longer than that, and paying more when you do.

You’re eligible for a new mortgage as soon as 1-2 years after a Chapter 13 BK discharge, depending on the loan product and GSE. Sometimes it might be a bit longer, but still nowhere near 7-10 years.

Not all jobs. If you have a security clearance, that would be pulled for bankruptcy.

Declaring bankruptcy can actually help save a security clearance in certain cases because it helps resolve the security clearance holder's susceptibility to coercion or bribery.

I don't hold a clearance though, so I can't speak from first hand experience. Always be upfront with your employer and clearance sponsor if you're considering bankruptcy.