June 8, 1998
Congress is considering making it harder for people to declare bankruptcy. The NewsHour has the report.
TOM BEARDEN: Shirley Nichols is moving to a house where she'll have six roommates to help pay the rent. It's not the kind of living situation that most 40 year olds who make a pretty good living would find themselves in. But Nichols can't afford to have a place by herself, because she was forced into bankruptcy last October.
SHIRLEY NICHOLS: I had worked entirely too hard and became ill, and then once I was ill, my doctor essentially told me to quit my job or consider dying. And those were pretty tough options. So I quit my job.
TOM BEARDEN: Nichols was out of work for 14 months. During that time she had no health insurance and many of her medical bills were charged to high interest credit cards. She found a less stressful job in public relations, but it pays a lot less. She tried to keep up, but interest on the $30,000 worth of debt she built up kept compounding. Finally-
SHIRLEY NICHOLS: I spoke with an attorney, and he gave me my options, and I agonized over that for a month. And I went back to him, and I said, I don't really feel that I have another alternative, so I filed for bankruptcy. And here I am.
TOM BEARDEN: Shirley Nichols is far from alone. Last year a record 1.3 million Americans filed for personal bankruptcy. That's a more than 350 percent increase since 1980, when just under 200,000 bankruptcies were reported. In a complete reversal of past trends bankruptcies are rising, in spite of an extremely healthy economy. Why this is happening has become a matter of considerable debate. Iowa Senator Chuck Grassley.
SEN. CHARLES GRASSLEY, (R) Iowa: There is no shame anymore with bankruptcy. Some people use bankruptcy for financial planning, and that's wrong.
TOM BEARDEN: But others, like Bankruptcy Attorney Bob Weed, who represented Nichols, paint a far different picture.
BOB WEED, Bankruptcy Lawyer: The credit card companies say that the stigma is gone from bankruptcy. What's gone on is they've spent the last 20 years getting rid of the stigma against debt, and if debt continues to rise explosively, bankruptcies have to follow, because people get into a situation where they can't pay.
TOM BEARDEN: Under current law people have a choice as to how they file for bankruptcy. Under one section, called Chapter 13, they get to keep most of their assets, but must agree to a repayment plan for any remaining debt. Under Chapter 7, most assets are converted to cash, and the money is used to pay off secured debt, like mortgage and car loans. Unsecured debt, like credit cards, is simply erased. About 70 percent of those who file for bankruptcy, like Shirley Nichols, use Chapter 7. That brings them to hearings like this one in Alexandria, Virginia. A federal trustee reviews the case and if he or she determines that nobody is trying to hide assets and if no creditors object, the debtor gets a fresh start. But at congressional hearings, lobbyists representing retailers, banks, and creditors say all this is far too easy. Mallory Duncan, with The National Retail Federation, says that hundreds of thousands of people, who can afford to pay at least some of their debt, are walking away scot-free.
MALLORY DUNCAN, The National Retail Federation: There are a lot of high-profile bankruptcies. You see people like Kim Basinger or Burt Reynolds or Tony Braxton filling for bankruptcy. Was it-a year ago People Magazine had a cover story called "Going Broke on $33 Million a Year," and basically featuring a number of celebrities who decided to wipe out their debts, who were having problems with debts. And people who might have been on the edge, who might have thought, well, can I make it or not make it, when they see someone like that and they continue to be celebrated afterwards, they say, well, maybe this is the approach to take.
TOM BEARDEN: So credit card companies have gone to Congress for relief. Two bills have been introduced that would make it harder for people to discharge their debt under Chapter 7. Michael McGary, Director of Public Affairs for Visa USA, is lobbying for bankruptcy reform.
MICHAEL McGARY, Visa USA: One of the things that we have found in research that we've conducted, surveys of people who have filed for bankruptcy over the years, is recently they're saying that they've learned of bankruptcy as an option from family and friends. Close to 50 percent of people surveyed, who had filed for bankruptcy, said that they learned of it as an option from family and friends, and that's really a sea change in the social attitude towards bankruptcy. And unfortunately, some people are viewing bankruptcy as a first option, rather than a last resort.
TOM BEARDEN: But Attorney Weed argues that last year the credit card company sent out over 881 million solicitations by mail trying to give people more credit.
BOB WEED: If they wanted to, you know, if they sent somebody a credit card, they could say, how much are you making and how much do you already owe and weed out a lot of the people who are hopelessly in debt. But they choose not to do that, because the lending is so profitable they don't want to do anything that interferes with them getting more and more and more.
TOM BEARDEN: Elizabeth Warren teaches bankruptcy law at Harvard. She says there are some abusers but says they are in the minority. Warren says credit card companies are now effectively trying to get the government to collect their bad debts.
ELIZABETH WARREN, Harvard University: If a rise in abuse explained the rises in consumer bankruptcy filings, then we would expect to see increased use by higher-income people, in other words people who weren't in so much serious trouble were starting to use the bankruptcy system. That's not what the data over time shows.
TOM BEARDEN: 1997 Census data shows the income of the average debtor declaring Chapter 7 has declined by more than half since 1980, going from an average of $42,000 to $17,000. But Visa's McGary says an industry-funded study found that many debtors could well afford to pay at least some of their debts.
MICHAEL McGARY: Ernst & Young looked at a nationally representative database of people who filed for bankruptcy. What they found was that in 1997, about 15 percent of people who filed for bankruptcy, or 150,000 people, had an ability to repay a significant portion of their debts.
TOM BEARDEN: Both the House and the Senate bills are similar in that they would set up a new standard that would exclude some people from filing for Chapter 7 bankruptcy and erasing their debts. The bills would force some people into Chapter 13, which would put them, instead, on a repayment plan. The Senate bill would give bankruptcy courts a greater role in deciding which chapter should apply to a debtor. One of the guidelines would be whether the consumer has the ability to pay at least 20 percent of all unsecured debt. The House bill is more stringent. Anyone earning more than 75 percent of the median national income would be subject to a new test. They would have to file under Chapter 13 if they have at least $50 a month left over after living expenses are deducted and if they can repay 20 percent of their debt within the next five years. Congressman George Gekas is the sponsor of that bill.
REP. GEORGE GEKAS, (R) Pennsylvania: When and if an individual or an entity reaches a point where the financial obligations, indeed, are burdensome but in a fulsome analysis of that particular situation it is found that there is some ability to repay some of the debt, then we provide a mechanism to accommodate that salient principle as well.
TOM BEARDEN: Attorney Weed strongly opposes the Gekas bill. He says it would devastate the middle class.
BOB WEED: The underlying idea of a mandatory repayment plan puts people in a hopeless situation, because they take every spare dollar. You can't save anything. And nobody gets through five years without something bad happening. You miss a payment to the court, you're thrown out and you've got to start your five years all over again.
TOM BEARDEN: Weed points to Shirley Nichols as an example. When she filed for bankruptcy, she was bringing home close to $45,000 a year. Under the Gekas bill, she would have been forced into Chapter 13, because her income was more than 75 percent of the median. Nichols says being put on a repayment plan would have changed her life drastically.
SHIRLEY NICHOLS: I would probably never be able to retire. I would probably have to work the rest of my life. And I'll tell you why I say that. I'm 40. By the time I got off the five-year program I'd be in my mid 40's. I'd have to start repairing my credit at that point. I'd have to start saving for retirement.
TOM BEARDEN: Some of the people we've talked to claim that incomes as low as perhaps $45,000 would be affected by these changes.
REP. GEORGE GEKAS: We know that under our bill the ones with the higher incomes will have a more difficult time escaping the plan that we have for them for repayment, because automatically they reach more than 75 percent of the median income, therefore, their circumstances are under scrutiny to determine whether their monthly income will have any overage with which they can start to repay.
BOB WEED: They're arguing that people who can afford to pay should pay but their definition of somebody who can afford is somebody who can pay 66 bucks against a monthly bill of $350. That's not afford to pay; that's hopeless. And if you take away the last $60 that somebody has after they've bought shoes for the kids and rent and food and gas in the car, then the car breaks down, there's nothing they can do.
TOM BEARDEN: The Gekas bill has also been criticized for putting child support payments on the same level as credit card debt. Child support obligations can't be erased by any form of bankruptcy. But the fear is that aggressive collection by credit card companies will tend to force parents to pay those debts first, rather than make support payments. Hillary Clinton weighed in on the issue in her syndicated column, saying she was for bankruptcy reform but "I do quarrel with aspects of the bill that would force single parents to compete for their child support payment with big banks trying to collect credit card debt." Rep. Gekas defends his bill, saying it doesn't change the status of child support under current law.
REP. GEORGE GEKAS: We have been for a long time-even prior to the latest blasts of criticism-trying to work out a system where we even increased the priority status of support.
TOM BEARDEN: If Congress passes bankruptcy reform legislation, one thing is sure: Debtors like Shirley Nichols won't be able to erase their debts as readily as they can under current laws.