Congress voted to change the bankruptcy code to require more people to pay some of what they owed because a majority of lawmakers believed Americans were using bankruptcy as an easy way out of debt.
Lawmakers believed fewer people would file for bankruptcy and that more of those who did file would enter Chapter 13 repayment plans instead of liquidating their debt through Chapter 7.
Two years later, the figures show they were only half right.
Far fewer people file for bankruptcy, but the hope that creditors would get more money from consumers hasn’t been fulfilled.
The credit card industry has the same levels of delinquencies it has had for years. About 4.5 percent of customers are more than 30 days late, said Dennis Moroney, an industry analyst with TowerGroup.
Income Gap
What about those who do file? Are more of them paying back more of what they owe?
“It works exactly the opposite,” said Hank Hildebrand, a Chapter 13 bankruptcy trustee, who has worked on behalf of creditors in bankruptcy cases for 25 years.
The law was supposed to move families with above-average income into Chapter 13’s repayment plans.
Under the old law, 70 percent of filings were in Chapter 7.
But most people declaring bankruptcy don’t make above-average incomes. And most of those who do, find they have too little money left after expenses to repay their debt.
Because the 500-page law is so poorly worded, full of contradictions and illogical, judges disagree on how it should be enforced, Hildebrand said. So people in similar situations have very different outcomes.
The new law “is like a Rubik’s Cube with a manufacturer’s defect,” Hildebrand said.
Nate Thompson, a spokesman for ACA International, a debt collectors trade group, said: “It really hasn’t produced a windfall for collectors. It hasn’t produced any benefits for creditors, either.”
But one group has profited: the car financing companies. In the past, Chapter 13 filers had to send monthly payments based on what the car was worth at that time. That’s because if the company repossessed the car, it could sell it for only that amount.
In the new law, debtors must pay the full car payment, so there’s less money available for credit cards or hospital bills.
Subprime Problems
In the first half of 2007, 62 percent of bankruptcy filings were in Chapter 7. The 8 percentage-point drop since the new law took effect is because of the subprime mortgage crisis, bankruptcy practitioners agree.
Attorney Charles Cuzydlo said about 60 percent of his clients file because they can’t handle the higher payments on their adjustable-rate mortgages. Some of those clients also have the traditional causes of bankruptcy, which are job loss, divorce and lost income from illness or injury.
Rising mortgage payments were what led Alphia Robinson, a single mother, into filing for bankruptcy.
In 2005, the Chrysler autoworker bought a $120,000 house with no money down. She borrowed the $5,000 in closing costs from a family member. She had bad credit because she spent irresponsibly on credit cards.
Because of her credit history, Robinson’s mortgage rate began at more than 10 percent and her monthly payment was $1,115. By October 2006, it was up to $1,491, as her interest rate climbed. She paid off her credit cards but still had a $350 a month lease on a new Dodge Durango. She has since returned it and now pays $285 a month on a 10-year-old Cadillac.