Personal Bankruptcy

By CAROLYN RUSHEFSKY
02/15/01

The two-income Eltingville family once had enough money for whatever they needed. Two cars, their own home, vacations. "We were a typical middle class family," said James, an electrician who asked to be identified only by his first name.

But a few years ago, his wife, a bank manager, was laid off after her bank was bought by a larger one; and construction slowed to the point that James was out of work for a few months.

Bills began piling up in 1998, along with about $40,000 in debt on seven credit cards.

When he couldn't even pay off the monthly finance charges, James said, he had no choice but to declare Chapter 7 personal bankruptcy, which wiped out his debts entirely. Filing Chapter 13 bankruptcy would have required paying debts over many years, and there simply wasn't enough money for that, he said.

James' case exemplifies the reason that most people file for personal bankruptcy, said bankruptcy attorney Paul Hollender, of Corash & Hollender, Sunnyside, who handled the case in October.

"It's because of personal hardship," Hollender said. "It's because someone lost a job, became disabled, got divorced, or the sole support of the family died."

The disadvantage to filing bankruptcy is that it stays on your credit report for 10 years, Hollender said. But there are ways to rebuild it slowly through the use of secured or pre-paid credit cards.

Nationally, personal bankruptcies have been on the rise for two decades and peaked with nearly 1.4 million cases filed in 1998 five times the number filed in 1980. The numbers began to decline in 1999 with 1.28 million Americans filing for personal bankruptcy and 1.26 million last year, according figures provided by the Administrative Office of U.S. Courts. One possible reason for the decline may be the booming economy, but some analysts say recent declines are likely to cause personal bankruptcy filings to rise once again.

Locally, the U.S. Bankruptcy Court for the Eastern District, which covers Staten Island, Brooklyn, Queens and Long Island, reflects a similar rise and fall, with 31,000 bankruptcies filed in 1998, compared to 22,000 in 1980.

According to Bill Milkman, administrative analyst with the court, the numbers dropped in 1999 to 26,130 cases, and fell still further to 22,217 cases last year.

"It was a record year in 1998, with an explosion in numbers at 125 cases per day, now down to about 90 a day a 20 percent fall off," said Joseph P. Hurley, a clerk with the Eastern District Court.

The recent drop in personal bankruptcy filings in this area "is a bit of a mystery," Hurley said.

One reason, is that people have learned to keep their expenses down, so they're not buying as much material off their credit cards. Another reason, might be that nonprofit financial counseling services are able to teach people to manage their debts better, Hurley said.

Nevertheless, the personal bankruptcy numbers prompted Congress to pass a bankruptcy reform bill last year that would make Chapter 7 unavailable to most consumers. Former President Bill Clinton refused to sign the measure in December, saying it was unfair to ordinary debtors and working families who fall on hard times.

Analysts, however, predict the legislation, backed by the banking and credit card industries, will have a good chance of passing under the Bush Administration.

But the bill would put a terrible burden on people who fall on hard times, consumer advocates say. "The bill stinks," said Luther R. Gaitling, founder and president of the Manhattan-based Budget & Credit Counseling Service, (BUCCS), a nonprofit group, whose clients include Staten Islanders.

"Yes, people are borrowing more and bankruptcies are up, but the creditor community is mistakenly claiming it's irresponsibility on the part of consumers." The real blame should be on the lend ers, he said. "Credit card companies extend credit too easily; it's not the consumers' fault," Gaitling declared.

He added that his organization offers free counseling on debt management "to thousands of people," negotiating agreements with creditors so that payments can be managed by spreading them out over time at reduced or waived interest rates.

Still, personal bankruptcy is the best option for about 7 percent of BUCCS clients, "When there's a catastrophe, an illness in the family, or the wage earner has medical problems, mental problems," he said.

Catherine Pulley, spokeswoman with the Washington, D.C.,-based American Bankers Association (ABA), said the bankruptcy laws must be reformed immediately.

She blames the high bankruptcy numbers partly on attorneys' ads urging consumers to "get out of debt quickly and easily" by calling them.

ABA's economists recommend a "needs-based system," that would allow catastrophic illness and other extreme circumstances as qualifications for personal bankruptcy.

"If you make below the national median annual income of $50,000 for a family of four, this bill will have no effect on you. But if you can pay some of your debts back, you should pay them back," Ms. Pulley stated.

Asked if the banks and credit card companies should be less liberal in issuing credit cards, Ms. Pulley said, "Responsibility has to be borne by the consumer. My car drives over 150 miles per hour, does that mean I should drive it at that speed?"

Filing for personal bankruptcy is "an opportunity to get a fresh start," said John Amodio, director of commercial banking services at Richmond County Savings Bank. "Unfortunately people abuse it, thinking it's an out for them."

In these cases, they wind up hurting others those they owe, and their family, which must live under the shadow of the person who went bankrupt, Amodio said.

"They don't realize the effects it has on the family, which can't use credit cards, or get loans for cars, or mortgages. It's tough; I person ally know people who've gone bankrupt and the difficulty their families trying to overcome it (the stigma)."

Alan Franklin, president of the American Credit Alliance, a Manhattan-based nonprofit consumer credit counseling agency, with an office in St. George, said he ad vises clients to pay off their debts over time because that's the best way to preserve your credit rat ing. His agency negotiates with creditors and gets them to agree to a manageable payment plan at reduced, and in some instances, waived, interest rates, he said.

Bankruptcy takes a heavy human toll, and many of those who seek protection from creditors see it as a humiliating admission of failure.

"It's a hard decision to make be cause you've got to live with it for the next 10 years," James of El tingville agreed. "Everything be comes difficult; you become a second-class citizen," he said.

"You don't want to feel you failed at something; but you do the best you can for your situation," said a Manhattan nursing student who also declared Chapter 7, personal bankruptcy last month through Hollender (based on her Manhattan attorney's recommendation). "I was desperate; I didn't have much of an option; I owed $15,000 on my credit cards."

She said she went to a debt counselor first, "who wanted me to pay off $400 a month. That's a lot of money every month. If I had the money to pay off my credit cards, I would have done it," said the student, who declined to give her name.

"I can start my life again," said the student, who works "off and on at a book store, a restaurant," when it doesn't conflict with her studies. "When I want to buy something, I pay cash. If I can't, I just don't buy it."

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