New Bankruptcy Law Fails; Vast Majority Can't Repay Debts
Hastings Group
At the time that Congress passed the infamous bankruptcy law, Chuck Grassley said the bankruptcy changes would clean up “a convenient
financial planning tool where deadbeats can get out of paying their
debt scott-free.”
NACBA
Analysis of More than 60,000 Consumers Processed Under New Law
Asks: “Where Are the Deadbeats” Congress Expected to Find and
Stop With Onerous Rule Changes?
WASHINGTON,
D.C. – The first analysis of tens of thousands of consumers seeking
protection since a new federal bankruptcy law went into effect last
October concludes that the changes put in place by Congress are not working as intended.
The report by the National Association of Consumer Bankruptcy Attorneys
(NACBA) finds that of the 61,355 consumers seen so far by credit
counseling firms – the required first stop under the new bankruptcy law
– nearly all (97 percent) are unable to repay any debts and that four
out of five would-be filers (79 percent) were forced into dire
financial straits by circumstances beyond their control, such as the
loss of a job, catastrophic medical expenses or the death of a spouse.
Entitled
“Bankruptcy Reform's Impact: Where Are All the Deadbeats?,” the
NACBA analysis is based on data provided by a cross-section of six
large and small credit counseling firms that have been authorized by
the U.S. Justice Department's Executive Office for U.S. Trustees to
provide bankruptcy screening. The credit counseling firms
responding to the NACBA survey were: Money Management
International (Houston, TX), GreenPath Inc. (Farmington Hills, MI),
Springboard Nonprofit Consumer Credit Management (Riverside, CA),
Hummingbird (Raleigh, NC), Institute for Financial Literacy (Portland,
ME) and ByDesign Financial Solutions (Los Angeles, CA).
Brad
Botes, executive director, National Association of Consumer Bankruptcy
Attorneys, said: “Contrary to the claims of proponents of
bankruptcy law changes that they would zero in on the alleged legions
of 'deadbeats' who supposedly were crippling the U.S. economy with
'billions of dollars in losses associated with profligate and abusive
bankruptcy filings,' the federal bankruptcy law changes that went into
effect on October 17, 2005 are doing no measurable good
whatsoever. Instead, they have put new hurdles in the path of
people who are already flat on their back due to financial crises over
which they have no control, such as the loss of a job, catastrophic
health care bills, and so on.”
Botes
noted that bankruptcy filings are down because many Americans may
mistakenly believe that the courthouse doors are barred to
them. The NACBA executive director said,
“Credit counseling organizations now know what bankruptcy lawyers and
other experts said all along: Congress got it dead wrong when it
passed the bankruptcy law. Even though the process is now
more cumbersome, time consuming and expensive than before, consumers
who need help should still seek out a bankruptcy attorney to explore
their options and figure out how to navigate this trickier and more
confusing process.”
John
Rao, attorney, National Consumer Law Center, said: “Bankruptcy
judges, attorneys, academic researchers and others warned Congress that
the bankruptcy filing rate was a 'symptom' and not the 'disease'
itself. So long as people lose their jobs, have uninsured medical
problems, and face other catastrophic circumstances, they will need the
protection of the bankruptcy system. This data is evidence of
that. All Congress has succeeded in doing with the new law is to
delay and drive up the cost of bankruptcy protection for those who
desperately need it.”
Leslie
E. Linfield, executive director of the Institute for Financial
Literacy, which is a credit counseling organization, said: “The
clients receiving credit counseling under the new bankruptcy law are at
their most vulnerable. Many of them are at risk of foreclosure, wage
garnishments or other pending legal actions. Bankruptcy for most is
their only option and a bankruptcy alternative, such as a debt
management plan, is inappropriate. Where the credit counseling industry
has the ability to truly serve these clients is assisting them in the
creation of family budgets, providing information on available social
services and educating these clients in sound financial management.”
The
following are key findings from a National Association of Consumer
Bankruptcy Attorneys survey of six major credit counseling agencies
that have dealt with a total of 61,335 consumers under the new federal
bankruptcy law:
* Almost
none of those seeking bankruptcy protection are able to repay their
debts. Fewer than one out of 20 consumers (3.3 percent) were
candidates for paying off what they owe under a debt management plan
(DMP), with the remaining 96.7 percent requiring the same bankruptcy
filing that they would have needed before the new bankruptcy law went
into effect. As the NACBA report notes: “Thus, the
credit counseling requirement under the new law, designed to steer
debtors who could repay their debts into a debt management plan, simply
imposes new costs and time burdens on individuals who can ill afford
either – and clearly are not the people for whom a DMP is feasible.”
* The
vast majority of Americans seeking bankruptcy protection are victims of
unfortunate circumstances, not reckless spenders seeking to shirk their
debts. Four out of five consumers (79 percent) seen by credit
counseling agencies are suffering from debt “caused by circumstances
beyond their control (e.g., loss of a job, medical expenses,
death, divorce or other change in marital status, increased minimum
payments on credit cards, predatory lending, and so on). As the
NACBA report concludes: “Thus, the masses of expected deadbeats
who were supposed to be identified under the new law and forced into
debt management plans have not materialized.” Only about one in five of
the respondents (21 percent) were identified as suffering from debt due
to “circumstances within their control”. Credit counseling agency
respondents explain that this number includes all of those who did not
deliberately seek out to get in over their heads financially but did
not fully understand how fees and
finance
charges associated with credit cards put them deeper and deeper into a
hole from which they could not escape, except through bankruptcy.
Credit
counseling firms ranged in size from small (with 100 consumers seen) to
quite large (with nearly 23,000 consumers seen). The end
date for the consumer-based information provided by the credit
counseling firms ranged from January 31, 2006 to the first two weeks of
February 2006. The highest estimate of consumers being able to
make repayments under a credit counseling DMP was 5 percent, with the
low being in the 1-2 percent range. Estimates of the number of
Americans seeking help for financial circumstances beyond their control
ranged from a high of 95 percent to a low of 65
percent. Of those believed to be seeking protection for
financial problems within their own control, the range was from a high
of 35 percent to a low of 5 percent.
The
NACBA report contrasts the pre-passage comments of opponents of the
legislation, who warned that the bankruptcy law changes would not work,
and proponents who argued that the new hurdles in the law would slow
down or stop abusers of the bankruptcy system. The report quotes
House Judiciary Committee Chairman F. James Sensenbrenner, Jr. (R-Wis.)
as predicting the bill would stop “billions of dollars in losses
associated with profligate and abusive bankruptcy filings.'
Senator Charles Grassley (R-Iowa) said the bankruptcy changes would
clean up “a convenient financial planning tool where deadbeats can get
out of paying their debt scott-free.”
ABOUT NACBA
Established
in 1992, the National Association of Consumer Bankruptcy Attorneys is
the only organization dedicated to serving the interests of consumer
bankruptcy attorneys and protecting the rights of consumer debtors in
need of bankruptcy relief. The Association's twin missions are to
help consumer bankruptcy attorneys more effectively represent their
clients and ensure that the voices of consumer debtors and their
attorneys are heard in the halls of Congress, the Judiciary, and in
other arenas where consumer debtors are affected.
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