The Bankruptcy Conundrum
Fresh Start Or A Decade of Punishment?
“ He uses statistics as a drunken man uses lamp posts, for support rather than illumination.”
Andrew Lang, Scottish poet, novelist and literary critic
Indebtedness is marketed. And in our capitalist society, bankruptcy is marketed right alongside indebtedness by attorneys, thanks to changes in federal and state laws and American Bar Association ethics rules allowing individual attorneys and legal firms to advertise. In fact, filing for personal bankruptcy is often marketed as a “fresh start” by those making their living profiting from the hardship of others…I mean, guiding ordinary people through the complicated process of bankruptcy. The idea is that after a personal bankruptcy is discharged and one is free of debt (if filing Chapter 7), a person is also free to live life as he or she has before. True, one is now unencumbered by old debt, but the punishment has only begun.
“…over 50% of all personal bankruptcies are attributable to ‘medical debt and job loss due to illness’ ".
These statistics on personal bankruptcy in the United States dig deeper into why people file for bankruptcy rather than simply the number of people filing per year, as I detailed in my last post. The statistics on the “why” behind the filing of personal bankruptcy vary widely because there is no question on the filing form requesting a reason for the bankruptcy, instead most statistics are gathered in surveys after the fact.
Nevertheless, many sources, including a 2019 paper published by the American Public Health Association, believe that over 50% of all personal bankruptcies are attributable to “medical debt and job loss due to illness”, with other types of job loss, poor or excessive use of credit, divorce or separation and unexpected expenses like floods, fires and earthquakes that require special insurance coverage, round out the top five reasons people typically file for personal bankruptcy protection.
Note that only one of the five reasons most people file bankruptcy relates to wild spending sprees or poor money management (and comes in at number three), the rest are unfortunate life circumstances that can deal near fatal blows, sometimes the least of which is to our finances. Left no other choice than to declare bankruptcy because of medical debt is particularly galling, since in the world’s other industrialized countries, medical debt is unheard of, and many of those who declare bankruptcy because of medical debt in the Unites States have health insurance coverage.
Yet each person who files for Chapter 7 bankruptcy is treated the same in one respect: they are all punished in the same way for a full decade of their lives:
— They have to scrape together court filing fees, attorney’s fees and fees for “money management” classes that serve no purpose other than a way for others to profit from each bankruptcy—and by the way, the court requires completion of these courses both before filing, and again before discharge;
— Federal law (Section 605 of the Fair Credit Reporting Act) mandates that bankruptcy remain on your credit reports for 10 years from the date of filing. And we all know what that means:
no credit at all for at least a couple of years, and eventually hideous credit card offers with near usury interest rates and fees (see photo below);
a likely inability to get loans of any kind, including for cars and mortgages, and checks on your credit report for jobs, insurance, rental applications and anything else a normal person attempting to function in this society might need;
and I wouldn’t discount the emotional stress, shame and embarrassment many people feel when they must apply for credit, like worrying about a denial and total strangers knowing you’ve filed bankruptcy.
“I’m not arguing that creditors don’t have the right to know if you’ve declared bankruptcy, for whatever reason, or be able to fully assess if someone is a good or bad credit risk…”
I’ve included a photo of a credit card offer I received two years after being discharged from my Chapter 7 bankruptcy (Apparently I saved the offer for over a year just for this post). Imagine the joy of a whopping $700 credit limit, minus an annual $79 fee and an $8 monthly fee—and that’s just for the first year—it goes up after that— and a 36% interest rate on purchases if you don’t pay off the balance each month.
Now, why would a credit card company offer such onerous fees and APR, coupled with such a small credit limit to someone who they know declared bankruptcy? Because they can. And they can because the law allows those who file for personal bankruptcy protection to be punished for ten years. Imagine receiving this “offer” in the mail after discharging your medical debt which you shouldn’t have had to pay in the first place, or losing your job, or a divorce. Does this person need to be punished further?
I’m not arguing that creditors don’t have the right to know if you’ve declared bankruptcy, for whatever reason, or be able to fully assess if someone is a good or bad credit risk, but why is the punishment required to be piled on for ten years. This current scenario allows the banks to extract more money from those who are financially down and perpetuates the cycle of poverty: you’ve filed for bankruptcy protection and have proven to the court that you do not have enough money or other assets to pay your debts; therefore, you should pay outrageous fees and interest rates to a bank in order to get a small amount of credit, that people with enough cash and assets and who have not declared bankruptcy do not have to pay to that same bank. It’s government sanctioned punishment for the crime of being poor.
Let me know what you think.
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Interesting article Joan. Depressing, but interesting. It seems no matter how debased one's financial circumstances are the 'business' of debt relief awaits...like circling birds.
I get it big time, Joan. This is well done. As someone who has watched loved ones go through this, through no fault of theirs (being married to the wrong person - the one who caused all the unpaid bills), I have watched first hand the way this causes more pain and strife. But, how do we change it? How do WE tell the banks to stop it? What are our choices?