Bankruptcies Continue To Climb
Bankruptcy reform legislation has been kicked around for more than a decade, and among supporters the feeling is that too many people are walking away from debt when they actually have the ability to repay all or some of it.
According to the Administrative Office of the U.S. Courts, non-business bankruptcy filings nationwide totaled 1.57 million for the 12-month period ending March 31, 2003 — a 7.4 percent increase over the previous 1.46 million record filings set for the same period the year before.
Business bankruptcy filings for the same period were 37,548, down 5.8 percent from the year before.
Business filings, however, take up much more of the courts’ time, noted Judge James D. Gregg of the U.S. Bankruptcy Court for the Western District of Michigan. In terms of time and energy, one business bankruptcy case might equal 500 consumer cases, he said.
But it’s the rising number of personal bankruptcy filings that have generated support for bankruptcy reform by means of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2003 (HR 975), said David Adams, president and CEO of the Michigan Credit Union League.
To his knowledge, just about everybody in the business of extending credit — retailers, banks, credit unions, finance companies and mortgage companies — backs bankruptcy reform.
The legislation is not intended to disallow filing of bankruptcy where it’s truly necessary, but to curb abusive bankruptcy filings, he said.
- Establishes, for the first time, an income-based “means” test that requires the court to assess whether a person’s financial condition truly warrants filing for bankruptcy.
- Emphasizes financial education through mandatory financial education provisions.
- Holds debtors responsible for luxury purchases, large cash advances and credit card purchases made right before filing.
- Reduces the opportunity for repeat filings.
Even though a nearly identical bill passed both chambers of Congress last year, it was derailed in the 11th hour after an abortion clinic violence amendment was attached.
The bill is a political hot potato, and this time around there’s no telling what might be tacked on to stop it, said Don Heikkinen, senior vice president and staff counsel for the Michigan Bankers Association.
In the Western District and Eastern District of Michigan, total non-business filings were 15,972 and 41,484, respectively, for the year ended March 31. The higher number in the Eastern District reflects its higher population, Gregg said.
Of the 90 federal districts in the United States, Michigan’s Western District currently ranks 10th and the Eastern District first in terms of increasing caseloads per judge, he observed.
The reform bill would provide 22 districts with 36 additional bankruptcy judges, including two for Michigan’s Eastern District, which currently has four.
As Adams sees it, since the bill focuses on consumer bankruptcy filings, the financial services providers more heavily involved in consumer finance have more to gain by the bill’s passage.
Bankruptcy filings represent the most significant portion of loan charge-offs for credit unions, he noted, and when unnecessary bankruptcy filings occur, the rest of the membership has to pick up the cost of loans that have to be written off the books.
A little bit of the cost gets tacked on to everybody’s tab, and that translates to everything from the price of cars to the price of credit to the price of doing business, Heikkinen added.
What’s behind the rise in bankruptcies?
Adams believes it’s a confluence of factors: the softening of the negative stigma once associated with bankruptcy; the tendency of attorneys to advertise bankruptcy as a quick fix; and the ready availability of credit to people 18 and up.
Heikkinen said there’s “almost a cottage industry of lawyers” encouraging people that bankruptcy is the easy way out of their financial difficulties. He’s convinced their marketing and advertising of the “easy way out” is spurring some of the bankruptcy activity.
“We understand the necessity for bankruptcy protection for those people that need it,” he said. “You could get sick, you could lose your job or there could be some other kind of catastrophe. There are legitimate times and purposes for declaring bankruptcy and those are the reasons it’s there.”
But a lot of filings don’t appear to fit into the “legitimate” category.
“What’s really kind of amazing is that you’re dealing with a customer who’s just doing fine on their loan payments and is never late, never misses a beat,” Heikkinen said. “They may be 24 months into a 48-month loan or something and then, bam, all of a sudden the next month you find out they declared bankruptcy and they’re not going to pay you the rest.”
Those surprise bankruptcy notices are becoming more and more common. Carlos Vazquez, chairman of the Ottawa County School Employee Credit Union (OCSECU) in Grand Haven, estimates that 90 percent of the bankruptcy notices his credit union receives are completely unexpected.
Richard DeKaser, chief economist for National City Bancorp, said the whole nature of lending has changed from what it was 20 or 30 years ago when borrowers were categorized as either credit worthy or noncredit worthy — and the latter were consistently denied credit.
As the lending community evolved, it addressed those differences by providing different kinds of loans to different kinds of borrowers, DeKaser explained. New products, such as nonprime mortgages, gave access to credit to people who previously would never have had it. That was a positive move, he said, but it had a dark aspect to it.
Though a sluggish economy can push up the number of bankruptcies, even in the prosperous years of the later half of the 1990s bankruptcies were increasing despite low unemployment and rising incomes, DeKaser pointed out.
“The simultaneous occurrence of higher bankruptcy rates alongside an extremely prosperous economy was largely a function of the change in the whole credit market that gave more marginal buyers access to credit.
“I think we’re going to have in America, going forward, a far higher incidence of bankruptcy than was the case throughout most of our history.”
Vasquez and other OCSECU board members champion consumer financial education as a deterrent to bankruptcies. They feel that in many instances people are filing more due to a lack of knowledge and understanding rather than a true inability to repay debt.
OCSECU has trained budget counselors in every one of its offices and has established a financial literacy program for both students and adults.
“We feel that bankruptcy, a great percentage of the time, is a situation people find themselves in not on purpose, but because they just cannot manage money,” said Vazquez, who also served on the MCUL’s bankruptcy reform task force.
He believes the lack of education in money management and budgeting is what’s driving more and more Americans into that situation.
“We would like a law that would require people to get some education before they are allowed to file for bankruptcy, because a lot of people do it under the auspices of some attorney who wants to make a buck in a hurry. We’re not sure people are always told what the consequences are once they file.
“We feel it’s very important that there be a requirement, if the law is ever passed, that forces people who file bankruptcy to really prove it is the only way out. At the same time, it would force these people to take some type of finance counseling so it won’t happen again.”
What are the bill’s prospects for passage this year?
DeKaser is doubtful it will pass. Heikkinen’s maintaining a wait-and-see attitude. Vazquez and Adams are hopeful.
Business And Non-Business Filings
Year Total Non-Business Business
2003 1,611268 1,573,720 37,548
2002 1,504,806 1,464,961 39,845
2001 1,307,857 1,271,865 35,992
2000 1,301,205 1,263,096 38,109
1999 1,419,199 1,378,071 41,128
1998 1,423,128 1,370,490 52,638
*Years ended March 31, 1998-2003
Source: Administrative Office of the U.S. Courts