Background: Going for Broke
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JIM LEHRER: Our bankruptcy update begins with an excerpt from a Tom Bearden report last year.
SHIRLEY NICHOLS: (moving) Yeah, that comes out, and then, this is the side that comes loose right here.
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. (hearing) 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.
MARGARET WARNER: But not the videotape. So each side gets the chance to put their spin on it.