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Bankruptcy filers defy stereotypes
The average debtor is not what you would imagine
The new bankruptcy law was designed to get all of the ‘deadbeat filers” out of the system. Those are the imagined shoppers and gamblers that ran up huge debts without intending to repay them. New studies show that there is no such person, and the average person who files for debt relief has a much different set of financial problems.
Continued below
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New debt relief filers have modest incomes and bad luck
The bankruptcy bill passed in 2005 by Congress was intended to clear the courts of people who filed for bankruptcy out of convenience. The credit card companies have long complained about people who ran huge shopping sprees and then decided that they didn’t want to pay. Congress finally gave in and created a tough new law that was intended to make it difficult for all but the most destitute of filers to have their bills wiped away by the courts. The bankruptcy law hasn’t worked as originally intended, and nearly all people who qualified to file before are qualifying to file now.
The credit card industry painted an elaborate picture of people with limousines and mansions who were filing just to get rid of the bills. But some statistics in recent studies paint a completely different picture of the average filer:
- The typical debtor has an average income of about $30,000 and debts of roughly $40,000. In other words, a debt that exceeds their income by 1/3. And note that the $30,000 income is hardly a luxurious one; in many parts of the country $30,000 is subsistence level, at best.
- More than 40% of filers had incomes of less than $20,000 per year, an amount that would qualify them as “poor” under nearly anyone’s definition.
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- The most common reason given for filing? No, it isn’t “Shopping spree” or “Didn’t feel like paying.” No, the most common reason given for filing was “illness or injury.” In other words, these people are filing because they cannot work to pay the bills.
- More than two million people filed for bankruptcy in 2005; that’s one in 60 American households. In all likelihood, someone on your street filed for debt relief last year.
- A “means test” was created to determine whether filers would have to repay a portion of their debt instead of having them wiped out by the courts. So far, 97% of those who would have qualified before will qualify now.
The question that everyone keeps asking is, “Where are all of those deadbeats that the credit card companies talked about?”
That’s a good question. A review of the above indicates that most filers are simply hard working people at the bottom of the economic chain who are in over their heads because they either got sick or lost their jobs. Instead of creating a complicated new set of laws to fight them as they try to get back on their feet, perhaps Congress should have found a way to get them some medical help instead.
In the end, this new law means relatively little. Aside from the mandatory credit counseling required by the law, most people will still be able to file as before. And the rush in late 2005 to file before the law took effect means that the courts are currently rather empty.
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