Reprinted from the Staten Island Advance, Thursday, 05/13/1999 Section: Business, Page A23
Deadbeats or desperate straits?
One of these terms could be applied to the nearly 1,550 Staten Islanders who filed for debt relief under the personal bankruptcy law in the past 12 months.
Are they welshers using the courts to skirt their debts, or people in real trouble turning to a drastic measure as a last resort?
The U.S. House of Representatives last week overwhelmingly passed a measure that would make it harder for those Islanders, and the nearly 1.4 million other Americans who sought debt relief in 1998, to use the bankruptcy courts to sweep away their debts.
The bipartisan bill, for which U.S. Rep. Vito Fossella (R-Staten Island) voted, passed with a 313-108 vote last Wednesday. It has not yet reached the Senate. President Clinton has threatened a veto.
The bill is aimed at reducing the growing number of people seeking bankruptcy protection. But West Brighton bankruptcy attorney Paul Hollender thinks Congress is shooting at the wrong target.
"The focus of this bankruptcy act, 95 percent of the focus, is based upon the false assumption that the reason people file for bankruptcy is because they can't manage their money or because they're reckless," he said. "People come to me because they're looking for a solution."
Mary Lou Ducey, an attorney who handles bankruptcy cases for the firm Corash and Hollender, said there is a misperception about how common it is to intentionally go bankrupt. "I think there are a lot of people who think people rack up a lot of credit card debt in order to file bankruptcy," she said. She estimated just 1 percent of her clients have done so. With the rest, she said, " it just happens. "
"I don't think most people use their credit cards with the thought in the back of their minds that they could file bankruptcy if the bills get too high," she said.
The case file is made up of people from all walks of life, the attorneys said. Doctors, lawyers, city workers, Wall Street executives and others have sought bankruptcy protection. They range from young people with low salaries who ran up credit cards too high, too fast, to heads of households who lost high-paying jobs and tried to live on credit until new employment came along.
Hollender said he sees people who have changed careers, couples who have had one spouse leave work and find themselves strangled by their mortgage payments, and widows who have lost their incomes when they lost their husbands. A small number of the firm's clients are recovering from gambling, drug or alcohol problems, he added.
Hollender did not dispute the fact that bankruptcy is becoming more and more common. "It's become a major part of my business," he admitted. Years ago, he had a few bankruptcy cases here or there, he said. Now, three attorneys and four paraglegals at his firm do bankruptcy work exclusively.
Statistics tell a similar story.
On a national level, bankruptcy filings have grown exponentially in the last two decades. In 1980, consumers filed 87 percent of the bankruptcy claims in the United States, for a total of 287,570.
The number has grown steadily every year since. The 1988 total, 549,612, was nearly double the 1980 total. The 1998 number, 1.398 million, was nearly five times the number of filings in 1980.
Locally, the U.S. Bankruptcy Court for the Eastern District reports the same. "The number of filings districtwide has certainly been going up," said Bill Milkman, an administrative analyst at the court in Brooklyn, which handles cases for Staten Island, Brooklyn, Queens and Long Island. "We set records every year for the past several years."
In 1995, the Eastern District court saw about 22,000 personal bankruptcy filings. In 1996, there were 25,000. In 1998, the number grew to 3 1,000.
There are two types of personal bankruptcy. The first, known as Chapter 7, allows people to have their debt obligations removed. The second, Chapter 13, establishes a repayment schedule with the courts, usually lasting three to five years, and usually involving some debt relief at the end of that schedule.
Credit card companies, which support the legislation, complain that too many people take shelter under the more lenient Chapter 7.
The House bill seeks to make it harder to file Chapter 7, as 1,549 Staten Islanders did from May 1998 to April 1999. Instead, the legislation would establish a "means test," based on debtors' income, to determine whether they must gradually repay their debts under Chapter 13.
For Hollender, that's putting the blame for the national problem on the wrong shoulders.
"The economy of the United States is based upon the purchase of consumer goods," he said, listing cars, electronic items and homes as examples. "The credit card industry prays on that psychology and they make 22 percent a year doing it."
"They've convinced people that all they have to do is make the minimum payments, so that people don't think of paying off debt," Hollender continued. "They think in terms of how much they can afford to pay each month."
But, he explained, when families find themselves with three or four or five cards, and the minimum payments start to add up, they can end up in trouble - Especially when they realize the payments they're making aren't reducing their debt because of high interest rates. "When people are paying as much as they can and they find it's not paying down their debt at all, they get completely disillusioned," he said.
Some individuals try to work out deals for repayment with credit card companies, but that is difficult to do, according to Ms. Ducey. "I have yet to come across a person who has successfully worked out a deal with credit card companies," she said. Sometimes, companies will accept less than minimum payments for a few months, but expect the card holder to make up those payments after a few months, she said.
That's when people turn to bankruptcy, the attorneys said. "I've seen a good number of people who have close to $100,000 in credit card debt," Ms. Ducey said.
By forcing more people to file Chapter 13 bankruptcy and create a schedule of repayments, the legislation is intended to reduce the amount of unpaid debt. But Ms. Ducey said she rarely sees Chapter 13 work now, when the reason most people use it is to save their home. "The typical Chapter 13 debtor right now is a person trying to save their mortgage, and the failure rate is tremendous," she said.
One reason the attorneys said they are so concerned about the means test that would shift people from Chapter 7 to Chapter 13 is that it would be based on standards set by the IRS for use in collecting back taxes.
But those collection standards are unrealistic, according to Ms. Ducey.
For Staten Island families of four, the standards allow $1,264 per month for housing and utilities, $529 for food, $59 for personal care, $61 for household expenses, $200 for clothing and $175 for miscellaneous expenses.
Currently, Chapter 13 filings use a person's typical monthly bills, rather than the standards, Ms. Ducey said. The standards don't allow for mortgage payments over the limit or other expenses that don't fit, she said. "It's not a reality-based determination anymore."
This aspect of the bill has also drawn criticism from the White House, which called the means test "inflexible and arbitrary" in a statement.
Before the House vote on the bankruptcy bill, Judiciary Committee Chairman Henry Hyde, R-Illinois., and Rep. John Conyers of Michigan, the panel's senior Democrat, tried to soften the means test provision, but their effort was rebuffed in a 184-23 8 vote against their amendment.
Conyers said the bill "is bad for women, children, working Americans ... it is good for the credit card industry."
But House Majority Leader Dick Armey, R-Texas, insisted, "This is about personal responsibility. It's become too easy to run up massive debts and then abuse the system to welsh on those obligations." Big bank-owned credit card networks, notably Visa and MasterCard, and retail-business groups say their losses from forgiven debts in bankruptcy have forced them to raise interest rates for consumers who handle credit responsibly.
Fossella did not return calls seeking comment on the legislation. Consumer groups, unions, civil rights groups and bankruptcy attorneys maintain the legislation favors corporate profits over the needs of families struggling with debt who need a fresh start. They insist that the credit card companies share the blame by flooding consumers with mailed solicitations to entice them into easy credit.
Ms. Ducey said she has had clients earning $20,000 who were able to run up $30,000 in credit card debt, and asked how someone with that low an income could get that large a line of credit.
Hollender said credit companies have to show some of the responsibility for creating the current situation. "They should suffer the consequences of their own ill-advised lending practices," he said.
There are aspects of the bill Hollender said he supports, including a mandate for personal finance education in schools and a requirement that credit card companies clearly disclose their fees for late payments and how long it would take customers to pay off balances by making only minimum monthly payments. He also supported the measure that would make child support payments a highest priority, putting them ahead of credit card debt and other obligations.