EXECUTIVE SUMMARY
Consumer Bankruptcy
Bankruptcy Qualitative Research

April 1997

Copyright © 1997, Visa U.S.A. Inc.
Although only a small number of credit cardholders actually file for bankruptcy- approximately 1 to 2 percent-bankruptcy losses are increasingly impacting the profitability of Visa Members. To shed light on this growing problem, Visa undertook research to better understand why over 1 million consumers filed for bankruptcy in 1996.

This white paper presents the findings of qualitative research conducted in August and September 1996 with consumers who had filed for personal bankruptcy during the past year. This research explored the causes of bankruptcy, how consumers' financial health status affected their decision to declare bankruptcy, the creditor/debtor relationship, the role of credit counseling, the bankruptcy legal process, and consumer's lives after bankruptcy. The study was one of an ongoing series conducted by Visa during the past several years.

Research Findings

Life before bankruptcy

For most of the consumers who participated in this research, life before bankruptcy was filled with financial difficulties. Many declared bankruptcy when they could no longer juggle their finances successfully. Some people with limited resources experienced a financial setback, such as losing a job or becoming disabled, that even-tually led to bankruptcy. Still others had simply lived beyond their means for years or even decades. They became so highly leveraged that any financial setback was enough to push them over the edge, into bankruptcy.

Causes of bankruptcy

While the downward spiral leading to bankruptcy is, in many cases, preceded by an unfortunate event such as a job loss or illness, some consumers clearly caused their own financial problems through their inability to curb their tendency to overspend. For many of these people, the use of credit cards only prolonged a bad situation, enabling them to hide from the reality of their circumstances while digging themselves in a deeper and deeper financial hole.

In many cases the consumer's attitudes toward their financial situation appeared to be an important contributing cause. They refused to recognize the severity of their situation or lived in denial.

The bankruptcy decision

Before filing for bankruptcy, most people had received stressful phone calls from creditors, and they often tried to negotiate for reduced interest rates, extra time, or smaller payments. Many mentioned that uncooperative creditors had been a significant factor in their decision to file.

For many, the decision to file for bankruptcy was taken after all other options were exhausted, including credit counseling, loan consolidations, personal loans, even the sale of their homes. In the end, many felt that bankruptcy was the only way to solve their financial problems, despite concerns about getting credit in the future or what family, friends, and business associates might think.

In general, flexible creditors fared better than those who refused to make concessions or were threatening. They were more likely to recover at least a portion of what they were owed. Some consumers attempted to make good on personal debts, but felt no strong obligation to repay large institutions, believing these organizations were in some way covered for such losses.

Roughly half of the people participating in this research were selected because they had gone to credit counseling. At the same time, it must be remembered that, in the end, credit counseling was of no help to these consumers, many of whom had not realized the extent of their financial problems before it was too late.

Some people felt that their credit counselor's plan was simply too difficult to adhere to, while others found that credit counseling offered them no viable solution. On their own, many were unable to renegotiate their debts with the IRS, mortgage companies, or other unwilling creditors, and a few were advised to go ahead and declare bankruptcy, since there really was no other solution.

Many perceived a number of benefits to declaring bankruptcy. Nearly everybody viewed it as a way to end harassing phone calls, relieve the stress of being unable to pay bills, and get a fresh financial start.

The legal process

Most respondents were unaware of the difference between a Chapter 7 and a Chapter 13 filing or the long-term consequences of filing for bankruptcy. Many felt overwhelmed by the legal process and, as a result, they left critical decisions, such as which chapter to file, to their attorneys.

Many opted for Chapter 7 because they wanted to be absolved of all debt, believing their credit record would be destroyed in any case. Others knew that a Chapter 7 filing would be deleted from their record sooner than a Chapter 13 filing. And some filed Chapter 13 to avoid being prosecuted for fraud for using their credit cards after they knew they were going to file for bankruptcy. Of those who opted for Chapter 13, rather than being forced into it, most did so to protect assets such as their home or for moral reasons.

After attending the 341 hearing, nearly everyone agreed that the proceedings were very easy - few questions were asked, almost no creditors appeared, and there seemed to be no serious consequences. Several said that if they had they known how easy it was going to be, they would have filed much sooner.

Some who filed Chapter 7 reaffirmed their debt to protect secured assets because of a personal relationship with the creditor or because they had a credit card they wanted to retain. Creditors who appeared at the 341 hearing most often succeeded in getting the debt reaffirmed. Fair and reasonable treatment by a creditor prior to declaring bankruptcy was nearly always a factor in the decision to reaffirm unsecured credit.

Life after bankruptcy

People experienced great relief after the bankruptcy filing process was over, and some felt that bankruptcy had made their lives significantly better. Many mentioned that their finances had improved, while some remained in the same dire financial straits as before. Some regretted their bankruptcies, and others realized that they could simply no longer continue to live beyond their means.

After declaring bankruptcy, most people still wanted access to credit, including a credit card in case of emergency. Some wanted a cash-based existence because they wanted to avoid the temptation to overspend. Others were using debit cards to avoid carrying cash and writing checks. Nearly all had received offers of credit, many of which were for secured cards. Some received pre-approved offers for regular credit cards, but those who applied were refused.

Conclusions

This qualitative research raised a number of areas of concern to creditors. These included:
  • Attitudes towards bankruptcy. While not definitive, the research appears to confirm the suspicion that bankryptcy no longer carries the serious social stigma it once did. While many of the debtors expressed remorse over having to file bankruptcy, many appeared to take a more relaxed attitide.
  • The Creditor-Debtor Relationship. Many consumers reaffirmed all or part of their debt, but generally only in those cases where they felt creditors had worked sympathetically with them in the period leading up to the bankruptcy.
  • Consumers need help and information when it appears they may be heading for financial trouble. They need to know about the availability of free credit counseling, and to understand the differences between a Chapter 7 and a Chapter 13 filing. They also need to better understand the long-term financial consequences of bankruptcy. Most importantly, they need proper counseling both before and after bankruptcy to enable them to make necessary changes in their financial behavior.