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Bankruptcy & Credit Cards

By Abby Scher EVEN AS BIG BANKS flood U.S. consumers with easy credit and higher credit limits, luring them into debt, they are trying to restrict consumers' access to bankruptcy protection. Stephen Brobeck, head of the Consumer Federation of America, pointed out this irony last July soon after the House passed an overhaul of the bankruptcy code and as the fall battle in the Senate loomed. A record 1.34 million Americans filed for personal bankruptcy in 1997, up 20 percent from the year before. The rate seems to be getting even worse--filings were up 6 percent in the first three months of 1998 compared to the same period in 1997. The federal bankruptcy code gives them two choices: file for "Chapter 7," which cancels their debts, or "Chapter 13," which sets up a payment plan. Chapter 7 is much more favorable to the filer but much worse for credit card companies because it wipes away most unsecured debt like credit card debt. Secured debts, like home mortgages or car loans, are backed by a piece of property. Under Chapter 7, these secured loans are paid off by selling the car or other assets the person has of value. Credit card companies and others holding unsecured debt can try only to persuade someone filing for bankruptcy under Chapter 7 to "reaffirm" her debt to them and pay it back anyway. Under Chapter 13, the filer can keep more of his assets by agreeing to pay off most of his debts over the next three to five years. Home mortgages are not covered under this deal, but credit cards are. The terms are so steep that two thirds can't keep up their payments and may even file for Chapter 7. The "reform" measure backed by banks and passed by the House and Senate would have pressed more people into taking Chapter 13 by setting up a means test for Chapter 7 filers, banning it for those with incomes above the national average. Under the threat of a Clinton veto, the House and Senate failed to iron out differences in their bills. The banks will have to try again. [ Sonoma County | MetroActive Central | Archives ]