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Tougher bankruptcy rules ahead

New legislation would prevent many wealthier people from filing under Chapter 7, but critics say the real problem is that credit cards are too easy to get.

By HELEN HUNTLEY
Published April 10, 2005

Travis Bingmann was 19 when he signed up for his first credit card, and it didn't take long before he had a walletful. Ten years later he owed the card issuers $27,000.

"If I didn't have money, I just put it on the credit cards," he said. "I was young and I was stupid."

Bingmann, now 29, says he was managing fine until three years ago, when he lost his job as a digital map maker. "I got "employee of the month' and two months later I got laid off."

Since then, he said, he has been earning about $13,000 a year installing windows "on and off, here and there." Without a steady income, he began using his credit cards to buy food and pay for repairs when the roof leaked on the small house he owns in the Lealman area of Pinellas County. The debt, he said, "just snowballed and got too big and out of control."

In October, Bingmann filed for bankruptcy, one of 24,875 cases filed in the Tampa division of U.S. Bankruptcy Court last year and one of about 1.6-million nationwide.

Bankruptcy filings have roughly doubled in the past decade, allowing consumers to wipe out about $40-billion a year in debt. Lenders and many politicians find that surge alarming and have pushed to toughen the federal bankruptcy law. This week they are expected to get their wish as the U.S. House of Representatives takes up a bankruptcy bill that already has passed the Senate. If it passes and is signed by the president, as expected, most provisions would take effect in six months.

"We want to keep the bankruptcy safety net, but we want to fight the abuses," one of the bill's sponsors, Iowa Sen. Chuck Grassley, said in February. "Bankruptcy shouldn't be accepted as a convenient financial planning tool for deadbeats, while honest Americans have to foot the bill."

The legislation would put a halt to wealthy celebrities moving to Florida to file for bankruptcy, using million-dollar estates to shelter their assets under the state's homestead protections. It sets up a two-year residency requirement for bankruptcy filing and limits the home equity exemption to $125,000 for properties owned less than three years and four months.

But wealthy filers who would get caught by those restrictions are few and far between.

"This bill seeks to shoot a mosquito with a shotgun," complained a group of 92 law professors who signed a letter opposing it. "By focusing on the opportunistic use of the bankruptcy system by relatively few "deadbeats' rather than fashioning a tailored remedy, this bill would cripple an already overburdened system."

They and other critics say the bill will make bankruptcy a more cumbersome and expensive process for everyone, but won't address the real problem. They say the increase in bankruptcy filings is a direct - and predictable - result of the expansion of consumer credit. Americans owe a little more than twice what they did a decade ago - more than $2-trillion, not including their mortgages, according to the Federal Reserve Board. Their incomes, however, haven't grown as fast as their debt.

"Insolvency is what causes bankruptcy," said U.S. Bankruptcy Judge Michael Williamson in Tampa. "No one wants to go bankrupt. It's the low moment of many people's lives. Making it more difficult will certainly make it more expensive, but it doesn't follow that it will make it occur less frequently unless something is done to stop easy credit to people who have too many credit cards to begin with."

The bankruptcy bill pending in Congress would change the system in many ways. One of the more significant is that it would prevent many people with above-average incomes from filing under Chapter 7, which wipes out unsecured debts such as credit cards.

Families with incomes above the state median who could afford to pay at least $100 a month toward their debts generally would be required to set up a payment plan under Chapter 13. In Florida, the dividing line is expected to be a household income of about $47,000 for two people and $60,000 for four.

The American Bankers Association says its research shows about 19 percent of bankruptcy filers would meet the income test, but only about 5 percent would be forced to file Chapter 13.

"It's targeted a small amount of people who are in some way abusing the system," said Laura Fisher, manager of public relations for the association, which supports the bill.

About 25 to 30 percent of individual filers now voluntarily file under Chapter 13, usually because they want to save their homes from foreclosure. Homeowners who are behind on their mortgage payments get time to catch up through a Chapter 13 plan. In addition to making payments on secured debts, such as mortgages and car loans, they must pay off at least a portion of their unsecured debts.

The current system already catches some abusers. The U.S. Trustees Office reviews cases and investigates those it considers suspicious. If Chapter 7 filers appear to have enough income to repay some of their debts, the bankruptcy judge can reject their effort to wipe out their debts, forcing them into Chapter 13 if they want any debt relief.

The legislation creates other hurdles for bankruptcy filing, including a requirement that all debtors go through consumer credit counseling during the six months before they file.

Most filers could use some education in money management and some of them might be able to avoid bankruptcy with a debt repayment plan. But the credit counseling industry has been wracked by scandal, which makes consumer advocates wary of the counseling requirement.

"You have a lot of consumer credit counseling groups now purporting to do this and doing a very poor job," said Tampa lawyer Jamie Proctor. "They're taking advantage of the debtor. Some of my clients have paid for a number of months under these counseling plans and the balance has not changed at all on their debts."

She said she thinks Congress is basing its action on misconceptions about who files for bankruptcy and why.

Bingmann's case is fairly typical.

"The average person who comes in my office has lost a job," said Tampa bankruptcy lawyer Robert Geller. "Other people have difficulties because they have a serious medical illness or they're in a divorce or in a one-parent family raising two children and not getting their child support."

When they have no savings, credit cards become a way to fill the gap between income and expenses. Geller said lenders compound the problem.

"They're taking advantage of people by presenting them offers of credit cards with misleading information," he said. "Not everybody is sophisticated enough to understand interest rates and all the penalties if you miss a payment."

The result is most bankruptcy filings list large credit card debts, often exceeding annual income. And most filers have other debts too. They owe doctors and hospitals. They owe on their cars and houses, sometimes more than the property is worth. Some have lost homes to foreclosure and cars to repossession, but have judgments against them for the difference between the amount of the loan and what the lender recovered. Some owe back taxes and have defaulted on student loans, which generally cannot be wiped out in bankruptcy.

"People don't have the safety net of an extended family to help out anymore and don't have the safety net of savings," lawyer Proctor said. "The average person who files for bankruptcy is really a good, decent person. Most have tried very hard to pay their bills. But they know nothing about finances."

Bingmann said he wanted to pay his debts, but realized, "there's no way we could pay all that back." His fiancee owed $25,000 on her cards, too. He said they decided to see a bankruptcy lawyer when Discover sued him for nonpayment last fall.

Since his credit card debts were wiped out in February, Bingmann said he has been getting offers in the mail for new cards. He said he plans to wait a year or so before taking the plunge.

"I've learned my lesson," he said. "If I can't afford it, I won't buy it."

Helen Huntley can be reached at 727 893-8230 or huntley@sptimes.com

[Last modified April 10, 2005, 00:39:14]