Why Does Bankruptcy Have Negative Stigma Attached To It?
When credit became readily available, in the 1950s and 60s, it was really a badge of honor. It was something you had to earn. Credit was not extended to everyone it was not prevalent so you really had to control your expenses and have a good income. In order to earn those rights – and this was in the days before credit scores and reports – in order to earn the right to basically have the bank take the risk to extend a credit card or credit line to you, you had to be at a certain income bracket. In decades to follow, around the 1970s and 80s, a bank named Providian discovered that they could make a lot more money if they started extending credit to a much larger group of people and not just high income earners.
What Providian discovered is making money on interest was an OK revenue stream, but making money on late fees and penalties was even more profitable. That is what they began to do. Their business model was to start extending credit to people who are at a higher risk of defaulting on their payments and that way Providian could charge penalties and late fees and make much more money. It was a widely successful business model. Whenever you have something like that in the financial sector, that business model gets picked up by other companies, such as Wells Fargo, US Bank and Bank of America and any other major banks across the country.
By the time we got into the 1990s, consumer credit was extraordinarily prevalent. I would not call it predatory, it was not that the banks were saying to people: “You can afford your monthly expenses, you should start living on credit.” But credit became so widely available that anytime somebody wanted to make a purchase that they otherwise could not afford, it was common to place it on credit. The average American family that carries credit card debt, has about $16,000 of credit card debt. It has become a major part of our economy and society. When you have the income to make the monthly payments, that is all perfectly well and good, but once something happens where you are no longer able to make the payments, that is where bankruptcy comes in to play and can help you get your life back on track.
The myths about the bankruptcy laws have been around for quite some time. Back in the 1950s, 60s and 70s, if you fit in that category of people who had done well to earn the right for the bank to extend credit to you, then later had to exercise your bankruptcy rights, the banks and credit card companies would look down on you and assumed that: you had exhibited certain spending behaviors and after you received this credit, you recklessly spent it and now you’re in a position where you cannot pay it off back to your creditors, shame on you. Over the years, as credit has been extended to more and more people it has become so prevalent that we see people are not reckless in spending their money or using debt available to them, instead it has become almost a necessary part of life. This is in large part because since the 1970s, when you account for inflation, employment wages have not significantly increased, but since the 1970s the cost of living has increased dramatically.
When unemployment or an unforeseen medical expense happens to you – if you cannot work because you are injured or sick and that makes you unable to earn a living – you are no longer able to carry the payments on the debt anymore. Those myths do not apply to many people in this day and age as they did years ago. What we see a lot now is that banks are trying to restrict bankruptcy laws, and trying to get the bankruptcy laws changed in order to make it more difficult for people to file.
In 2005, they did just that. They authorized a change to the bankruptcy laws and lobbied Congress to pass it through and so the Congress did pass the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005 (“BAPCPA”). The BAPCPA added the Means Test onto Chapter 7 bankruptcy, which acts as somewhat of a gatekeeper for people filing for Chapter 7. A lot of that is still built on these myths that, “We don’t want to incentivize people to just run into bankruptcy court because it is actually quite a good deal, the laws are so powerful, and you get to protect so many assets. Why would not more people file for bankruptcy protection?”
We have to make sure that if you average a certain income that we are either going to keep you from filing for bankruptcy or we are going to put you into a chapter of bankruptcy where you make payment plans and pay at least something to your creditors. The myths are still out there that people are reckless if they need bankruptcy and restraints need to be in place. The myths persist, but like I said, the top three triggers of bankruptcy are unemployment, medical bills, and divorce. When the economy goes down, as unemployment goes up and with economic downturns, we see that bankruptcy filings go up. Even the data bears out statistically that people do not file bankruptcy because they are reckless; people file bankruptcy because they need to do something about their personal household income situation; when unemployment goes up, bankruptcy filings go up.
It is a pretty reliable statistic, so in 2008, when the economy crashed there was a large percentage of people out of work and the real estate market was not far behind. A lot of people who were self-employed real estate agents were not selling as many homes as they had before, those people did not have the income that their previous financial budget was built on, including the debt load that they were carrying. At some point, you run out of other options and bankruptcy is an option. The myths really do not bear that side of the story, they are based on antiquated notions of what it means to have credit extended to you and living in this vacuum where nothing bad ever happens to anyone.
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