Study Claims New Bankruptcy Law Not Working as Congress Intended

Secured Lender, The, May/Jun 2006 by Cove, Brian P

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 61,335 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.

The NACBA analysis, entitled "Bankruptcy Reform's Impact: Where Are All the Deadbeats?, " 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."

The following are key findings from a National Association of Consumer Bankruptcy Attorneys survey of six major credit counseling agencies that lave dealt with a total of 61,335 consumers under the new federal bankuptcy 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.

Compiled by Brian P. Cove, Commercial Finance Association deputy executive director.