What Kids Need to Know About Your Bankruptcy

How Much Should You Share About Your Bankruptcy?

Girl with calculator
In talking about family finances, consider the kids' ages. Getty Images

We talked about whether to address family financial issues with the children and whether it’s a good idea to tell the kids you filed a bankruptcy case in “Should We Tell the Kids About Our Bankruptcy?” Now let's dig a little deeper and examine children’s stages of development to decide how much detail you should share if you decide to have that conversation with the youngsters.  

Before we talk about how to address money issues by age, consider these guiding principles:  

  • Your comfort level. How comfortable are you talking with your partner about money? How comfortable are you talking with your kids about money and your finances in general? They'll take cues from your demeanor. If you show them that you’re comfortable talking about how tight the budget is or whether you can take that week's vacation at the lake next summer, they'll be more likely to accept what you say with confidence than if you look worried and sigh a lot.  
  • How long will the financial issues last? You may not have to say anything if the belt-tightening is short term. As long as you don't make a big deal of it, the kids probably won't either. Long-term unemployment, recovery from illness, divorce and the like will no doubt loom large in day-to-day family life and will almost always require some sort of explanation.
  • If you file bankruptcy, the type of bankruptcy you file can also influence how much information you pass on to your children. Chapter 7 "straight bankruptcy" is relatively short-term, lasting only about four to six months. The overwhelming majority of people who file a straight bankruptcy give up no property. The children aren't likely to be directly challenged by a Chapter 7 case. No one is going to come take their XBoxes from them. Contrast this with a Chapter 13 payment plan case that will last three to five years, require a strict budget and allow no new debt without court permission. Children are much more likely to feel the effects of a Chapter 13.  
  • Kids just want to feel secure. Above all, our children want to feel safe more than anything. They want to know that their parents have things under control, even if the parents don’t feel that way themselves. It’s like that old deodorant commercial: “Never let ‘em see you sweat.”

There are times, however, when all your good intentions go for naught.

Extended unemployment or underemployment, family breakups and long-term medical issues can lead to ​voluntary liquidation of property like college funds to pay for groceries. They can result in involuntary losses like car repossession, eviction or foreclosure. These events in the life of a family are difficult, if not impossible, to disguise.

Even then, putting all your cards on the table is probably not the best policy, at least in the midst of the worst of it. You might consider taking the conversation down a path that puts a positive spin on even the most difficult transition. You don’t have to use words bankruptcy, foreclosure or repossession. You can say something like, “We can’t afford two cars right now so we gave up the more expensive one to save money.”

Take time to acknowledge your children’s feelings about the issues. Let them know that you will miss the old house, too, but that the family is looking at a brighter future because of it.  

So what, exactly, do you tell the children about your decision to file bankruptcy? It depends on their age. 

Preschoolers

Preschoolers are pretty sharp cookies, but they're not very sophisticated about how money works. They’re just beginning to play grocery store at this age.

According to researchers at Yale University, preschoolers who are asked to pick the coin with the highest value among a penny, nickel and dime will almost always choose the nickel because it’s the largest. Most will be too young for a discussion about anything as technical as family finances.

Elementary School

At this age, kids know what money is supposed to do. They know that their parents and others get it from working at a job, at least most of us. Perhaps you’ve started them on an allowance and introduced the concept of savings.

It’s just a short leap to loans and credit cards after they have an understanding of savings and building interest. Do the kids have a sense of what it means to purchase something today but pay the bill later? Have they expressed curiosity when you use a credit card?

Even so, kids this young generally won’t be old enough to process the import of what it means to forgive a debt. If they feel changes in family culture or notice that you’ve put some austerity measures in place, it would be best to address the issues when they come up — but avoid extended explanations of the “B” word.

You might consider a simple explanation instead: You’re cutting back on spending to save more money so you can afford the things that are important to you, like paying for your home or saving for college. Enlist their help in finding ways to save money. This is a good time to talk about brands versus generics, and about coupons, savings accounts and impulse buying. How about making provisions for a treat to reward the kids for doing their part in preserving family resources? 

Middle school

Children have a pretty firm grasp on the credit economy by middle school. They may not understand exactly what compound interest is, but they do know that you can lose your stuff if you don't pay for it. Middle schoolers are also acutely aware that some families are better off financially and others are struggling. They will not necessarily understand why their parents have values about making and spending money, and that those values might cause them to lose out on the latest fashions or electronics.

They should be mature enough to understand that bankruptcy will help rid the family of burdensome debt, and that it will free up resources to help the family achieve other worthwhile goals like helping to pay for their college educations or a new car. Even if you feel ashamed for filing bankruptcy — which you shouldn’t — try really hard not to pass that judgment along to your kids.

You may have to reassure them that they will not lose everything in a bankruptcy. Kids this age would be mortified if their friends, classmates and teachers learned about the bankruptcy case. No amount of reassurance will convince them that their lives have not come to a screeching halt, so you might want to be discreet about who you tell outside the immediate family.  

High School

Your teens will notice changes in your spending habits. Their perceived needs are greater. You might decide to cut some of their activities to take pressure off the budget. Teenagers will notice these changes before your other kids will.

At this age, children are capable of understanding that families can spend more than they make, that people lose jobs or have cuts in income, that medical bills can wreak havoc, that poor spending habits have consequences. Many will take classes at school that teach consumerism and financial responsibility. They’ll learn that creditors have ways to collect debts, including foreclosure and repossession. They'll also learn that borrowers have rights and that borrowers can get a fresh start with debt consolidation or by filing a bankruptcy case.

If your children don’t cover these topics in school, you should. This is a fine time to introduce all these issues and the methods you'll use to implement your plan to enhance the family’s bottom line. You might also consider having your teen look for a part-time job or start a business. This might not only take pressure off the family budget, but it can also help your teen feel invested in the process of restoring the family’s financial health. Your teenager could surprise you when he exhibits a level of maturity you didn’t know was there.