Debt Free!: Your Guide to Pers

Describes the risks and advantages of filing for bankruptcy, explains when it is the most appropriate action, and offers advice for bankruptcy preparation

Debt Free and Guilt Free
DEBT FREE AND GUILT FREE BY JAMES P. CAHER AND JOHN M. CAHER When we were kids, a close friend of our father's made some unfortunate financial decisions and was forced to declare personal bankruptcy. We'll never forget the sight of this man, a proud and successful local businessman and former collegiate athletic hero, sitting on an empty beer case after pawing all of his furniture, weeping like a child over the humiliation and shame he brought to himself and his family. In those days, filing bankruptcy was scandalous and this man was treated, by even his closest relatives, as a social outcast and miserable failure. Thirty years later, bankruptcy is a far more common occurrence: According to the Administrative Office of the U.S. Courts, personal bankruptcies are at record levels. But irresponsible spending, and a devil-may-care attitude toward filing bankruptcy, only explains a portion of this alarming, and potentially disastrous, trend. More significantly, the meteoric rise in personal bankruptcy filings is an inevitable result of the aggressive and unconscionable marketing practices of the credit industry, and a largely insidious precursor of what may be around the corner for many, many seemingly comfortable middle class folks. With all the good judgment and class of a liquor supplier who sends sample products to recovering alcoholics, banks have for years been issuing credit cards to people, and in some cases animals, with reckless abandon. One federal judge in Florida was so appalled at a credit card company's lax lending policy that he was recently moved to award the firm his "greedy lender of the year" award. "What kind of underwriting procedures were used by First Card Services Inc. in approving an $8,000 advance to a consumer with over $40,000 in credit card debt and no income for over a year? " the judge ponders. "Where did the debtor, a 57-year-old Cuban refugee with a third grade education get his magic card in the first place? He testified that he never applied for the card. They sent it to him in the mail. Is this a great country or what?" Currently, some 68 percent of Americans are in credit card debt, paying an average of 18 percent interest on their MasterCard and Visa accounts. At the end of last year, Americans owed nearly $400 billion on credit cards, with many consumers carrying a debt load surpassing their entire annual income. Quite simply, the people who flood mailboxes with those pre-approved credit card offers every week have made a business decision that more is gained through the reckless extension of credit than is lost through bankruptcy. And they're right, at least in the short run. By charging consumers 18 percent for money that costs them 3 percent, the banks are making a fortune. To put it in dollars and cents terms, a consumer who owes $12,000 on credit cards, spends no more and pays the minimum every month will be in debt for 27 years and will end up paying $11,000 in interest! Not a bad return on an investment, especially since only about four of every 100 debtors defaults. Yet, the potential impact on our economy is astounding as the country's financial health is quite literally resting in a house of (credit) cards. And the cauldron may be about to boil over. Increasingly, bankruptcy experts are detecting a disturbing pattern. For the first time ever, people filing bankruptcy, although completely overwhelmed with debt, show no early signs of financial distress. There are no judgments, no negative reports to credit agencies and no indication that Wimpy will not be able to fulfill his promise to pay Tuesday for today's hamburger. Reason: With multiple credit cards, debtors are able to maintain their free spending lifestyle and remain current by paying the minimum amount each month. Simple arithmetic reveals that this game of Old Maid cannot continue indefinitely. Bankruptcy statistics show that for many people, the game has been lost. Debtors need to take their finances under control, and there is help available. Many communities have Consumer Credit Counseling services which can negotiate with creditors and sometimes offer sound advice. However, consumers must be aware that those agencies are funded by the credit industry and their allegiance is NOT to the consumer. Often, their advice does more to aid the creditor than the lender. A better alternative is Debtors Anonymous (P.O. Box 400, Grand Central Station, New York, N.Y., 10163-0400), a group that helps people get control of their finances and repay their debts on a schedule that is both realistic and tolerable. Bankruptcy, of course, is a last resort, but it needn't be a traumatic experience, an exercise in self-flagellation or moral question, any more than a decision to have a appendectomy is a moral issue. The credit industry has decided on purely dollars and cents grounds that the rewards of recklessly issuing credit are worth the risks that some customers will be forced into bankruptcy. Likewise, consumers should regard bankruptcy as a financial tool which should be utilized when the benefits outweigh the drawbacks. As a rule of thumb, if a debtor cannot reasonably expect to pay off all existing debt, while maintaining a reasonably prudent lifestyle, within three years, bankruptcy is worth considering. With the aid of the bankruptcy court, our father's friend was able to climb out of a financial abyss, resurrect his career, raise a family in a nice home in the suburbs and eventually retire comfortably. It's the kind of success story that Congress had in mind when it drafted the bankruptcy code to provide debtors with a fresh start. James P. Caher and John M. Caher are co-authors of Debt Free! Your Guide to Bankruptcy Without Shame (Henry Holt & Co., 1996). James Caher is a bankruptcy attorney in Eugene, Oregon. John Caher is state editor of the Albany, N.Y. Times Union and an award-winning legal journalist.