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People who think there's no longer a stigma attached to bankruptcy or foreclosure need to come sit in my chair.

Every day, it seems, I hear from yet another borrower struggling with massive debt -- credit card bills, an unaffordable mortgage or both -- who absolutely refuses to throw in the towel. These people don't want to be deadbeats. They want to pay what they owe.

They certainly don't want to hear what I have to say, which is that the train has already left that particular station. Much of the time, they're in too deep to dig themselves out. They have more credit card debt than they have annual income, or they've been out of work for months, or their mortgage payments on their "underwater" homes are eating them alive, with no relief in sight.

The only logical option is to hit the reset button and salvage what's left of their financial lives.

Financially shortsighted

But people in debt often aren't the most logical creatures. They'll do desperate, foolish things, like drain a retirement account to pay credit card bills or try to save a home.

Liz Weston

Liz Weston

Most of the people whom bankruptcy attorney Stephen Elias counsels these days have long since spent their retirement money in a futile attempt to pay their mountains of debt. These are funds that would have been protected from creditors, and emptying the accounts hasn't done any good: The borrowers are in bankruptcy and foreclosure anyway, plus now they face fat tax bills and the prospect of impoverished retirement. Every $10,000 pulled from a retirement fund can cost you $100,000 or more in lost future income.

"It's so sad," said Elias, the author of "The Foreclosure Survival Guide." "I almost never talk to people until after it's done, when it's too late. I don't know why people don't talk to a lawyer before they drain their retirement."

Even thinking of tapping your retirement funds to pay bills is such "a big red flag," as debt expert Gerri Detweiler puts it, that you need to consult a bankruptcy attorney.

"Another similar problem I see is that consumers will scrape together all their available cash to pay off or settle a balance with one creditor, but they don't have a plan for paying other creditors," said Detweiler, a personal-finance expert for Credit.com. "The other creditors may still aggressively try to collect and force the consumer into bankruptcy. If you have limited funds to settle debts, then you should be settling all or most of them, not just a single account."

Should you really feel guilty?

So why do people take financially shortsighted actions? They're often trying to do the right thing without really understanding the consequences. They're so driven by guilt that they throw every available dollar at their problem, not realizing they're making matters worse.

"Most people I talk with feel an enormous amount of shame when contemplating bankruptcy or walking away from a house," Detweiler explained. "They feel like they will be branded as bankrupt or a deadbeat, but, ultimately, these days it's often a difficult financial decision more than a moral one. I say that because many people who file bankruptcy or give up their home have done everything they can do to avoid it, and there are simply no other options left."

I've said that people in debt aren't the most logical creatures. Of course, people who are not in debt can be pretty illogical, as well. They'll condemn those who don't repay their debt as thieves, which is absurd. Theft is a crime, but owing money typically isn't. Neither is owing money fraud, unless you borrowed knowing you couldn't repay the loan. Most people go into debt fully intending to pay back what they owe.