From Credit Cards To Casinos Reasons For Bankruptcy Vary

May 8, 2002
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GRAND RAPIDS — The record-setting run of bankruptcy filings in 2001 was fueled by recession, but individual reasons for the increases are varied.

"Certainly the recessionary trend is a big one, but even before it set in 2000 and 1999, a lot of the problem could be traced to credit card debt that gets out of control," attorney Daniel B. Hess Sr. said. "A lot of people may not be behind on their bills, but they have robbed Peter to pay Paul and absorbed other credit card debt, and may need to file. If people go to one credit card to pay off a higher interest card, that's fine. The only problem is that those banks have wound things so tight that they keep borrowers on a tighter schedule, and if they are one day late with payment, that bargain interest rate is gone and they're over the limit and paying a higher rate and additional late charges.

"If people take out consolidation loans and use it to pay off other debt and then incur more debt or use the credit card again, they're worse off than they were before.

"Another trend over the last few years are the casinos," Hess added. "There are several middle-aged or older people who have put a lot of gambling debt on credit cards. These are people who would not otherwise have experienced financial difficulties, but they may have racked up $100,000 in credit card debt they cannot pay due to the gambling."

Those filing under Chapter 7 are unable to pay back creditors and are required to liquidate their fixed assets — selling off their homes or cars — so creditors may recoup a portion of what is owed to them.

Chapter 13 allows debtors to pay back their creditors at a reduced rate by either canceling interest or with lower payments extended over a longer period of time. Debtors must have a regular income in order to file Chapter 13.

Attorney David C. Andersen, who has a staff of 10, said that he advises nearly 90 percent of his clients to file Chapter 13. He said his caseload for 2001 is up approximately 10 percent from the previous year, and represents his highest ever.

"This is a record-setting year nationwide, but the economy is better here than in some other parts of the country or the state," Andersen said. "We have a great deal of success with Chapter 13s, whereas other parts of the state or country have much lower success rates. The nationwide success rate for repayment on Chapter 13s in under 50 percent, but we have a success rate of two out of three."

Repayment terms under Chapter 13 can last up to five years. The mark on credit reports for Chapter 13 remains for seven years as opposed to 10 years for Chapter 7 filings. Debtors with secured creditors — such as home mortgages or automobile loans — are more apt to file Chapter 13 if they have a steady income to make payment arrangements.

"A lot of lenders look more favorably at Chapter 13 because of the successful efforts made to pay back their debts."

Andersen said that there are several factors that contribute to the success rates of his Chapter 13 clients.

"One is that there is an economy here of employment that even when it's at its worst is probably better than other parts of the state or country," he said. "Another thing is that we have a very user-friendly bankruptcy system where the bench and the bar work well together. It's a good bankruptcy system; we have good judges, lawyers and trustees who work well with debtors."

As for the near future, Andersen predicts that his business will remain brisk.

"As long as people live a little beyond their means and don't have money in their savings accounts, there is going to be a need for bankruptcy and Chapter 13," he said. "Bankruptcy touches 1 percent of the national population each year, which means one out of every 100 households is affected. I don't see that trend changing immediately, even if the economy takes a dramatic upswing.

"If people spend more than they make either through credit card purchases, debt borrowing or whatever, my job will remain secure."

Pending changes in bankruptcy laws — which would make it more difficult for debtors to file — have been debated in Congress since 1997. Some attorneys believe that people are filing to beat the street before any new laws come into effect.

"Some people who may have wanted to solider on a while longer may have filed to take advantage of the current bankruptcy law," Hess said. "The new bankruptcy act will require more paperwork and makes it more difficult to file.

"It passed both houses of Congress in 1997 and '98 by overwhelming margins, but the Conference Committee never got together on the House bill and Senate bill. One bill made it more amiable to credit card companies. When both houses overwhelmingly passed bills and the Conference Committee approved, it was vetoed by President Clinton in 2001. It seems like each time something has intervened to rescue those who represent debtors in bankruptcy."

Andersen concurs.

"The thing that might hurt bankruptcy relief is if Congress changes the law and makes it more difficult to file," Andersen said. "It will make it more difficult to make payments, and there will be more people losing their homes and cars.

"Right now, Chapter 13 is good for people who need to save their car and spread out debt on a vehicle over the next three to five years. Other creditors need to suffer first. If people can't afford to keep their cars, they could lose their cars, which means they could lose their jobs. It is a vicious circle, and bankruptcy law is aimed to stop that circle and get people back into the economy."

Andersen also warns about home equity loans and possible pitfalls of leveraging too much on second, third or fourth mortgages.

"Ninety percent of the time somebody borrows money to pay another debt, it's a bad thing," Andersen said. "I have told people they can no longer afford their house and they leave my office in tears. People borrow against their house and can no longer afford to make payments.

"Mortgages — which are secured up to 30 years — cannot be renegotiated like credit card debt. Borrowing money on their house is a mistake most of the time."

Andersen said that it is oftentimes better to file for protection under Chapter 13 than to get buried deeper in debt with additional consolidation loans.

"There are times when debt consolidation through a loan is good if you have a lot of home equity and can afford a nice easy, low payment. But if you have debts and cannot afford those debts, you should see a professional before you go to the mortgage industry. Mortgage brokers are generally paid a commission on closed mortgages, and a lot of them are like salesmen, and don't offer impartial advice.

"I'm in the business to make money while helping people, but I have a professional ethical standard to help people make the right choice," Andersen said. "Some people might not benefit under the bankruptcy law, and I may advise them to go somewhere else if it's better for their financial situation."

The run of bankruptcies most likely will continue into 2002, according to Hess.

"I think the trend will continue even though the overall economic situation should get better," Hess said. "I don't think it will benefit enough people to prevent them from filing."

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