What Deadbeats?

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.