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BANKRUPTCY:  CAUSE OR EFFECT?

 

By W. Stephen Graves, Juris Doctor

Attorney at Law

 

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 may not seem relevant to today’s debates over bankruptcy, but as one of far too many examples of Congress’ dubious wisdom in letting special interest lobbyists make policy and write legislation, it is.  By 2005 an economy that squeezed the middle class while it boomed for the rich had created an alarming increase in bankruptcy filings.  Any thoughtful person could see that the law hadn’t changed to become more debtor-friendly or more creditor-hostile; the economy had changed to push more people over the edge.  When Congress should have felt alarm at the fact that so many working families were watching their American dream turn to dust, in fact it responded to the crisis by adopting the attitude of the bankers that there was a growing number of deadbeats taking advantage of a too-lenient system.  Basically Congress saw too many people getting poorer, so they outlawed poverty.  Now, seven years later, our economy is in the dumps, unemployment is at painfully high levels and even more people are losing their financial footing every day.

             If it isn’t clear enough that change in the economy and not change in the law (of which there was none) caused the increase in bankruptcy filings in the early 2000s, consider the findings of a Harvard University study on the major causes of bankruptcy:

 

Cause # 1 is illness.

 

Inability to pay medical expenses represents 62% of personal bankruptcies. The real kicker here, for health care reform opponents, is that NEARLY FOUR OUT OF FIVE (78%) OF THESE FILERS HAD HEALTH INSURANCE.  This is particularly poignant evidence that people are falling out of the middle class and accepting the cold comfort of bankruptcy.  Serious disease or injury can be so costly as to wipe out the assets of many working and middle-class families, even when health insurance pays a portion of the cost.

 

Cause #2 is unemployment.

 

In addition to the loss of income that follows job loss, losing a job usually means losing health insurance coverage as well.  For a breadwinner who no longer has an income at all or who must support a family with unemployment benefits, the availability of COBRA coverage continuation can be little more than a cruel joke, because the bill comes at the very time the money to pay it has gone.

 

Cause #3 is poor credit management.

 

Yes, some people buy more than they can afford and run up debt to the point where they can’t pay.  If there is any legitimacy to the creditor lobby’s distaste for bankruptcy, this is it.  However, there is NO evidence that poor credit management was a greater factor in bankruptcy filings in 2005 than it was nearly 30 years earlier, when the previous bankruptcy law went into effect, or two hundred years before that, when our country was founded and debtor prisons were outlawed.  Consider also that creditors have very sophisticated tools (credit reports, FICO scores) for evaluating the creditworthiness of debtors BEFORE they extend credit.  Thus they have themselves at least partly to blame when they give credit to people they know or should know are already maxed out.  The simple fact is that while some people incur debt they can’t pay, even those people are entitled to a fresh start when it becomes evident that they can’t pay and creditors can only create more misery by continuing to hound them. 

Most debtors try everything they know before taking bankruptcy.  Many try debt consolidation or credit counseling agencies.  Most debt consolidation plans fail, however, and only delay bankruptcy filing.  The problem with debt consolidation/credit counseling agencies is that they live off the payments debtors make through them, so they can’t necessarily be counted on to tell a debtor when his or her situation is hopeless and he or she would be better off in bankruptcy.

 

Cause #4 is divorce.

 

Family breakup creates tremendous financial strain on both parties and their children.  First, legal costs of divorce can be high, particularly when custody of children is at stake.  Second, setting up and maintaining two households on the same income that used to support only one is a recipe for financial disaster.  Third, wage garnishments for child or spousal support can make it difficult or impossible to pay other bills of one new household, while failure to pay child or spousal support can impoverish the other.  

 

Cause #5 is casualty and theft losses.

 

It almost goes without saying that uninsured losses from fire and natural disaster, fraud, theft and the like can force people into bankruptcy.  There are holes in many insurance policies that leave room for catastrophic financial loss from earthquake, flood or even shifting soil.  Fraud or market reverses can decimate savings.  Sudden or disastrous loss can also have a domino effect, leading to deteriorating health, job performance or family relationships.

   

Does it really matter why?

 

There are many reasons why people are forced, or perhaps “choose,” to file bankruptcy, but poor credit management is a distant third on the list of causes.  Of course personal responsibility is important, but think of it this way:  Do we deny Medicare benefits to a retiree who is diabetic because he or she failed to exercise or keep a healthy diet, or to a lung cancer patient because he or she smoked?

 

Call us at 210-738-3230 or, outside area code 210, 1-888-360-6162 if you need help with your own debt crisis or a family member, friend or neighbor needs help.  Remember that at our firm you’ll speak and deal with a lawyer, not a paralegal.