Americans are going broke in record numbers. In 2005 Congress overhauled the bankruptcy system to stem the tide of filings. What's behind the boom in going bust? See this special report co-produced by Marketplace and American RadioWorks.
INTRODUCTION (KAI RYSSDAL): It was a classic name for a piece of legislation: The Bankruptcy Abuse Prevention and Consumer Protection Act. After years of lobbying, mostly by banks and credit card companies, President Bush signed it a year ago today. The first revision of bankruptcy law in almost twenty years. Lenders had convinced Congress there were too many deadbeats walking away from their debts, that it was too easy to go under.
But the new rules haven't changed much, as Chris Farrell of American RadioWorks reports
Tom Fordham and his family left Long Island after 9/11. They moved to a small town about an hour outside Burlington, Vermont. He had a hard time finding work.
TOM FORDHAM: I pretty much went about a year, year-and-a-half without any work at all. Maybe 10 days worth of working at a hotel and that didn't work out that good.
To make ends meet, he cashed out his pension and took out his credit cards. Tom ended up owing $40,000. The house of credit cards collapsed when he missed one payment. He paid the bill over the phone a week later, but by then it was too late.
Then that rate jumped to the default rate.
A credit card's "default" rate is around 30%. Worse, late on any payment to any creditor, your other cards can also hit you with the default rate. That happened to Tom. He was outraged.
TOM FORDHAM: You just pushed me over the edge, and I can't keep up with this. Even if I tried to keep up with this, I couldn't keep up with this . . . . I could run on a treadmill and eventually I'm going to fall off.
Tom filed for bankruptcy. To him, it was simple economics.
TOM FORDHAM: I see the policies of these companies are all business, and the way they treat me is all business, I'm just an account to them. . . . I'm just a number, and well, they're just a company to me.
Last year, lenders convinced Congress that there were too many Tom Fordhams in America.
Elizabeth Warren is a law professor at Harvard University:
ELIZABETH WARREN: The central vision of the new bankruptcy bill is to make consumer bankruptcy harder, more expensive to file and offer less protection for those who make it through the system.
The image pushed by lenders was that America was the land of credit card junkies. Well-off families piled on debts at the mall and on vacation. Then they got rid of their debts by filing for Chapter 7 bankruptcy. Under Chapter 7, you're forced to sell off assets to pay down loans. When your assets run out, most of your remaining debts are cancelled. The new law was designed to force people into Chapter 13 repayment plans. Creditors like Chapter 13 because they collect more money. But did they get what they wanted?
MICHELLE WHITE: The new law changes things a lot. . .
Michelle White is an economist at the University of California, San Diego. She says the law created a whole host of new hoops, like mandatory credit counseling.
MICHELLE WHITE: . . . but it only changes things for people who fail the new means test.
The new law says that if you earn less than the median income in your state, you can still file for Chapter 7. And here's the rub: Tales of well-off spendthrifts made for good copy and good political spin. But most people going broke live below the median income. For instance, the new law made no difference to Tom. He made less than Vermont's median income. Michelle White is skeptical the new law will cut down on filings.
MICHELLE WHITE: If you think of the problem being people who lower down the income scale, people will still file under Chapter 7 and things won't be very different than they were before.
JUDGE ROBERT KRESSEL: There's a huge percentage of Americans living financially fragile lives.
Judge Robert Kressel is head of the Minnesota Bankruptcy District Court.
JUDGE ROBERT KRESSEL: Many people are a paycheck away from bankruptcy. As soon as anything comes along, lose a job, overtime, medical bills, unexpected medical expenses, anything they haven't budgeted for, they're in trouble.
The bankruptcy boom is a symptom of our cutthroat economy. Pink slips and wage cuts are routine. And creditors are competing more than ever to lend to ordinary Americans. These days, everybody's mailbox is stuffed with loan offers.
ELIZABETH WARREN: Congress can pass all the laws it wants but it won't change the underlying economic realty.
The new bankruptcy law went into effect last October. Claims that the law would make it almost impossible to file stoked a near panic. Bankruptcies soared to a record 2 million last year. But the boom went bust once the deadline passed. Filings were down as much as 73 percent in the first quarter of this year compared to a year ago. Still, Judge Kressel doubts the current slow pace will last much longer.
JUDGE ROBERT KRESSEL: People get used to the Act and how its works, discover it's not draconian, just more complicated. As people get used to it we'll go back to the same levels we would have been at anyway.
Put it this way: The fundamentals haven't changed. Globalization is gathering momentum. Creditors are eager to lend. When all is said and done, odds are personal bankruptcies will climb back into record territory.