Life and Debt
More people are filing for bankruptcy in Massachusetts as tough new US restrictions are set to kick in this month. For many, regrettably, the era of second chances will be over.
One thing is clear about the bankruptcy reforms set to take effect October 17: They will make it a lot tougher for people swimming in debt to get the fresh start that's been promised to Americans for more than a century. That is by design. For years, credit card companies and the banking industry pushed Congress to make it harder for people to walk away from their debts under the widely used Chapter 7 process. They wanted a means test that would force many middleclass folks to pay off their debts over time and sought provisions for credit counseling and paperwork - lots of paperwork - detailing one's financial holdings.
What was driving the changes was obvious. Financial institutions had grown tired of people dissolving their debts. They wanted the money they were owed. And when their effort to change the law finally succeeded last spring, they cheered. The new law, advocates say, would stop high-income people from dodging their debts.
But here's the thing: Most people who file for bankruptcy aren't trying to beat the system. They are people who got sick or divorced or lost their job. People on the financial edge. People cold-cocked by natural disasters. In a sign of just how tough the new reforms will be on regular folks, bankruptcy attorneys in Louisiana cried out for relief from the law in the days after Hurricane Katrina. What good is credit counseling when you don't have a roof?
Now, on the eve of the new regime, many are worried. America was built by risk takers, some who got in deep in pursuit of a dream. And one could argue that there's nothing more American than a second chance. All that now has changed. It will soon be harder to start over. A vicious financial cycle is about to get worse. "The cycle is this," says Travis Plunkett, legislative director for the Consumer Federation of America, an advocacy group: "People end up in financial trouble. Lenders can figure it out. They target these individuals with high-cost loans that exacerbate their financial troubles." Borrowers, he says, "end up in bankruptcy, and they come out, to be targeted by the same people again."
Some of these people will no longer have the luxury of filing for bankruptcy. Some literally won't be able to afford it, says Boston bankruptcy lawyer Victor Bass, as attorney fees are expected to double. Others may shy away from what is about to become a much more complicated process. Even some experts are confused. "Right now," says Boston College law professor Ingrid Hillinger, "we have no idea how this is going to work."
Predators, says Plunkett, will fill the void, offering questionable financial escape hatches to those in need. This has always been part of the problem. Duncan MacDonald, former general counsel for CitiBank, argues that banks and credit card companies are partly responsible for the explosion in bankruptcy filings in the last 20 years. Their reckless lending led in turn to reckless spending, which led to a nationwide bankruptcy bonanza. In Massachusetts alone, personal bankruptcies increased from 3,122 in 1980 to 18,444 last year, according to the American Bankruptcy Institute, a trade association. Now, many more are rushing to file before the reforms take effect. There were, according to the banking institute, some 6,032 filings statewide between April and June - up 18 percent from the same quarter last year.
Laura Fisher, a spokeswoman for the American Bankers Association, a trade group, emphasizes that the reforms will not apply to people who earn less than the median income in their respective states: $47,176 for a single earner in Massachusetts, $85,157 for a family of four.
But that still leaves half of the population. Warren Agin, a bankruptcy lawyer in Boston, describes an elderly woman he met recently. She took a cash advance off her credit card, he recalls, put it in her bank account, and then filed for bankruptcy. It was the sort of tactic that credit card companies hope to stop. But Agin says the issue isn't so black-and-white. The woman, he explains, was using her cash advance to buy food and pay her rent. He wonders how the new law will affect people like her.
Keith O'Brien is a freelance writer in Jamaica Plain. E-mail him at keithob@aol.com. 