Can filing bankruptcy make you smarter?

A new book, Scarcity: Why Having Too Little Means So Much, explains why filing bankruptcy can make you smarter about money.

The book authors, Harvard Professor Sendhil Mullainatha and Princeton Professor Eldar Shafir, don’t talk about filing bankruptcy.  What they do talk about is how smart people get stupid, when things are tight.  When people are rushed, we make bad decisions about time; when people can’t pay their bills, we make bad decisions about money.

When the situation seems impossible, we choke up.

When people come to talk to me about bankruptcy, it’s usually because their debt situation is impossible.  And for a lot of them, it’s been impossible for a long time.  Being an an impossible financial situation–scarcity–often means people make one financial mistake after another.

Research by Prof. Eldar Shafir shows why people should be smarter about money after filing bankruptcy.

For most people, filing bankruptcy is a smart decision.  And, according to the research in this book, it should make people smarter about money decisions from then on.

That’s what I see.  After bankruptcy, people often do really well.  Not just because “they learned their lesson”–although that’s a common perception.   More importantly, once the pressure is over, people’s good sense kicks back in.

Here’s a quick review of the authors’ findings.

Filing bankruptcy helps you sleep, too.

One other thing jumped out at me when I read about this research.  Being in a tight spot financially can knock 13 points off your IQ, they said–“the equivalent of one night’s sleep.”

Wow–that’s another reason filing bankruptcy makes people smarter.  After filing bankruptcy, people sleep better.  That’s NOT from Professor Mullainatha and Professor Shafir.  That’s from a study I did, with Survey Monkey, of people three years after bankruptcy.  Eighty-eight percent of the people said they sleep better after bankruptcy.  You can read about that here.   Getting enough sleep makes your smarter, too.