Blog sponsored by Bankrupt-Law.com


By Michelle Singletary
Sunday, February 26, 2006; F01

In what will undoubtedly be the first of many "I told you so" reports, the
National Association of Consumer Bankruptcy Attorneys has found that,
overwhelmingly, people who file for bankruptcy protection aren't deadbeats
who went on shopping sprees with the intention of shirking their debts.
That's quite contrary to what was being claimed by supporters of the new
federal bankruptcy law that went into effect last October.
For years, those proponents argued that billions of dollars were being lost
because people were simply being allowed to walk away from their debts.

"As retailers, we have seen firsthand the dramatic effect bankruptcy has had
on both consumers' finances and on our ability to serve the public," wrote
Steve Pfister, senior vice president for government relations at the
National Retail Federation, in a letter to House members as the bankruptcy
bill was being debated. "These filings ultimately cost the tens of millions
of households we serve hundreds of dollars each in unseen costs every year.
Unfortunately, many of those losses are the result of misuse of the law by
irresponsible, higher-income filers."

On the day President Bush signed the bankruptcy bill, he said: "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."

The new law requires people to get credit counseling before they can file
for bankruptcy protection. The premise behind this provision is that by
forcing people to get counseling, it will show that many bankruptcy filers
in fact have enough money left over after taking care of their essential
expenses to repay creditors.

I spent several years reporting on bankruptcy and I saw no evidence
(academic or anecdotal) to support claims that many people were gaming the
system.

Now, in the first analysis of the tens of thousands of people who have
undergone credit counseling since the law passed, the bankruptcy attorneys
association found that nearly all (97 percent) of the debtors truly couldn't
pay their debts.

The association examined data provided by six large and small
credit-counseling firms from a cross-section of the country. All of the
firms have been authorized by the Justice Department's Executive Office for
U.S. Trustees to provide the required pre-bankruptcy counseling. In total,
the firms that were surveyed counseled 61,355 consumers.

Four out of five filers felt forced to seek bankruptcy protection because of
a job loss, catastrophic medical expenses or the death of a spouse,
according to the report, "Bankruptcy Reform's Impact: Where Are All the
Deadbeats?"

One in 30 consumers (3.3 percent) was a candidate for paying off what he or
she owed under a debt management plan (DMP), the report indicated. With a
DMP, a debtor makes one monthly payment to a credit-counseling agency. The
agency then distributes the funds according to a payment schedule it has
worked out with the person's creditors.

Creditors may agree to lower interest rates or waive certain fees if they
are being repaid through a DMP, although this is happening less and less as
more people sign up for such plans. Typically it can take 36 to 60 months to
repay debts through a DMP.

The highest estimate of consumers being able to make repayments under a
credit-counseling DMP was 5 percent, with the low being in the 1 to 2
percent range, according to the report.

"The masses of expected deadbeats who were supposed to be identified under
the new law and forced into debt management plans have not materialized,"
the association's report concludes.

Only about one in five (21 percent) of those seen by a credit-counseling
firm was identified as racking up debt due to "circumstances within their
control." In many of those cases, people said they didn't fully appreciate
how credit card fees and finance charges could put them deeper and deeper
into debt.

Okay, if you must, call the latter folks deadbeats. It's hardly a revelation
that if you buy something on credit and you don't pay the bill off the next
month, you're going to be charged interest. With the low minimum payments
required, it's easy to amass a lot of debt over time. We all know this.
But I do sympathize with people who experience a major disruption to their
income or become financially ruined by uncovered health care costs (a
growing and disturbing trend in America). It is for these people we have
bankruptcy protection.

There is at least something good to come out of the new law. If you're
looking for a reputable credit-counseling agency -- even if you aren't
filing for bankruptcy -- I'd suggest you choose one now certified by the
Trustee program. At least then you'll have less chance of dealing with a
deadbeat agency.

To find an agency on the list, go to http://www.usdoj.gov/ . In the search
field type "approved credit counseling agencies."
· On the air: Michelle Singletary discusses personal finance Tuesdays on
NPR's "Day to Day" program and online athttp://www.npr.org.
· By mail: Readers can write to her at The Washington Post, 1150 15th St.
NW, Washington, D.C. 20071.