Where Are All the “Deadbeat Debtors”?

The bankruptcy reform act your Congress and your President said was necessary to curb all the abusive debtors out there has been in effect for five months today. Let’s stop and take a look at how effective it has been. By now you already know that I thought the “Bankruptcy Abuse and Consumer Protection Act of 2005” was not addressed to any significant abuse and certainly did nothing to protect consumers. So it won’t surprise you that I tell you that it’s been a failure.

You also probably already know that I don’t do any bankruptcy work. So my concerns about the fundamental unfairness and just plain meanness of the bankruptcy act are not related in any way to my livelihood, except in the sense that in my work with people going through divorce I see every day the sadness, the desperate hopelessness, of financial challenges. I don’t have a professional axe to grind, but I certainly have a moral one.

When the President signed the bankruptcy act a little less than a year ago, he said this:

In recent years, too many people have abused the bankruptcy laws. They’ve walked away from debts even when they had the ability to repay them. This has made credit less affordable and less accessible, especially for low-income workers who already face financial obstacles . . . The act of Congress I sign today will protect those who legitimately need help, stop those who try to commit fraud, and bring greater stability and fairness to our financial system.

Among other things, the bankruptcy act required credit counseling as a prerequisite for any bankruptcy filing.

So now that the bankruptcy act has been in effect for five months, we’ve seen that most people seeking bankruptcy were deadbeats, right? Of course not.

The National Association of Consumer Bankruptcy Attorneys, admittedly with its own bias similar to mine, surveyed six credit counseling agencies in February about the clients they had seen since the bankruptcy act took effect in October. What these agences reported, according to NACBA, is:

  • Less than 4% of those seeking bankruptcy protection could afford to pay their debts. More than 96% of those seeking services from the credit reporting agencies needed bankruptcy protection. So the credit counseling requirement in the bankruptcy act did no good and just imposed an extra cost on already-burdened consumers.
  • 79% of those seeking bankruptcy protection needed it because of circumstances beyond their control – like loss of a job, medical expenses, death or divorce, or an increase in required minimum payments on a credit card.

My friend Brad Botes said it well:

If congress had gotten it right … we would see a third or half of potential bankruptcy filers being compelled to make payments under a credit counseling debt management plan . . . instead, only about one out of 33 can pay back anything.

If congress had gotten bankruptcy reform right . . . the changes they made would be exposing most would-be filers as “deadbeats” – instead, credit card counseling organizations are finding that the vast majority of people were pushed to the brink of financial collapse by circumstances over which they had no control.

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