Toward a Debtor Nation?
Connecticut bankruptcy filings decline 11.8 percent
During the period of 1995 to 1997, the United States witnessed a sharp explosion in the rate of personal bankruptcies. For the twelve month period ending June 30, 1998, more than 1.4 million people filed for bankruptcy.However, by the summer of 2001, personal bankruptcies were running 10% below the levels of a year ago. There have already been some 78,500 fewer bankruptcy filings in 2001 than in the same period a year ago, and it is expected that 2001 should end with a one-year decline of well over 100,000 personal bankruptcy filings.
This trend is reflected in Connecticut bankruptcy filings, as well. During the twelve month period ending June 30, 1998, 13,486 bankruptcies were filed in Connecticut and 9,052 cases were pending as of that date. One year later, for the period ending June 30, 2001, 13,194 cases were filed, representing a 2.2% decline and 7,984 cases were pending, representing an overall decline of 11.8% in Connecticut bankruptcy filings.
The initial long-term increase in personal bankruptcy rates over the last five years was due in large part to an increase in household debt burden caused by lenders extending large amounts of credit to consumers unable to repay such a large debt burden. Lenders also continued to expand on questionable lending practices by sending out undocumented credit cards to the very old, the very young, the unemployed or the unemployable. There has been a close statistical connection between the number of bankruptcy filings and consumer debt burden, with more debt leading to more bankruptcy filings.
In addition, personal medical crises have often left consumers with doctor and hospital bills in excess of $100,000.00 per illness, and severely declining property values have left numerous homeowners facing deficiency judgments in excess of $50,000.00.
These difficult financial dilemmas leave the average consumer with no choice but to file personal bankruptcy to save themselves from a lifetime of suffocating debt burden. As lenders tighten up their lending practices and the economy continues to stabilize and improve, the rate of bankruptcy filing is expected to continue to decline.
Despite repeated attempts over the last two years to change current bankruptcy laws, the 106th Congress adjourned without passing a new bankruptcy bill. The issue is not over, however, by any means. It will be on the Senate agenda again for next year, with increasing pressure from credit card and bank lobbyists to stop the explosion in bankruptcy filings over the last five years.
The bill, as currently proposed, was plagued with controversy from the start. It took the Senate Judiciary Committee almost two weeks to work through it, and when it went to the Senate floor for consideration, there were 320 amendments filed. Debate on the Senate floor filled nearly two weeks before the bill was pulled. Our own Senator Christopher Dodd was instrumental in introducing amendments to specifically protect women and children from the ravages of the proposed new law.
Even though the number of bankruptcy filings has recently declined, the lobbyists in the banking and consumer credit industries will continue introducing bills in the next Congress to propose broad restrictions on consumer bankruptcy protection. This so called "means testing" or "needs-based" bankruptcy was incorporated into several bills in 1998 and 2001, and can be expected to be introduced once again in the 107th Congress.
The result of these harsh proposals would be to force many debtors who are currently eligible for Chapter 7 bankruptcy filings into Chapter 13 filings instead, while denying consumers the fresh start they currently deserve and enjoy under current law.
Proponents of bankruptcy reform say too many people who are able to repay some of their debts through future income in a five-year Chapter 13 plan instead file for Chapter 7 bankruptcy.
However, in a recent study conducted by the American Bankruptcy Institute, 97% of Chapter 7 debtors had too little income to repay even 20% of their unsecured debts over five years, assuming they could dedicate all of their income to a five-year repayment plan. Only 3% of Chapter 7 filings had sufficient repayment capacity to be barred from Chapter 7 filing.
The removal or severe curtailing of a person's ability to file for Chapter 7 bankruptcy will remove the hope of a fresh start for millions of American consumers. It will also have a sharp impact on working families, seniors and single mothers with children owed child support, by forcing consumers to continue to carry and pay back a larger portion of their debts, at the expense of their personal and familial financial obligations.
All eyes will be on Congress as it reconvenes in January, 2000. The millions of dollars spent to date in an attempt to limit a consumer's right to file bankruptcy and obtain a full discharge of debt will continue to be threatened. Women's groups, seniors and civil rights organizations will continue to oppose any changes to the current bankruptcy legislation, unless a safe harbor exempting poor debtors is adopted, non-dischargeable debts are kept in check and lien stripping is retained for Chapter 13 filings.
In the current lending environment, an average credit card interest rate of 15% costs the lender only about 6%. This large interest rate spread makes it profitable for lenders to issue credit to consumers without regard to the high probability of default.
Consumers and their representatives will continue to fight for balanced legislation that protects the rights of all working Americans. The real burden of reform should be placed where it belongs, on the credit card portfolio of the banking industry, which fully expects to have some percentage of loss due to write-offs, as it continues to reap enormous profits by seeking out even more risky borrowers.
Audrey B. Blondin practices in Torrington.
She is a member of the National Association of Consumer Bankruptcy Attorneys
and has lobbied on behalf of responsible bankruptcy reform in Washington, D.C.