EXECUTIVE SUMMARY
Consumer Bankruptcy
Bankruptcy Debtor Survey

July 1996

Copyright © 1996, Visa U.S.A. Inc.
Despite a generally expanding economy and a long period of declining unemployment, personal bankruptcy filings in the U.S. have almost tripled since 1981. During the first half of 1996, personal bankruptcy filings increased by 26 percent over the same period in 1995 and are expected to top the one million mark by the end of 1996.

Losses stemming from cardholder bankruptcies account for nearly half of Visa Member net credit chargeoffs. Net credit chargeoffs more than tripled in the 9 years between 1987 and 1995 and are projected to nearly double over the next several years. In 1995, bankcard industry losses resulting from personal bankruptcy filings increased 45percent over the previous year, to $4.7 billion. Visa projects bankruptcy losses will reach nearly $9 billion by 1997.

Visa has taken action on several fronts to help mitigate these losses. These include: creation of a lawyers network to assist Members, establishing a criminal pursuit unit, a variety of information services, surveys of Members, consumer education, and legislative advocacy.

This white paper reports the results of a survey of individuals who have filed for bankruptcy in the past 12 months. It was taken to investigate the factors that influence individuals to file for bankruptcy, to learn about the impact of bankruptcy on such individuals and to generate recommendations for changes in the law or the process.

Results of the Survey

The number one reason for filing for bankruptcy, cited by nearly 29 percent of the debtors, was simply that they were overextended. Other major causes included the loss of a job, medical and health reasons and divorce or separation.

More than a third of the respondents reported that the "last straw" that led to their filing for bankruptcy was one or more of the tactics creditors used to collect what was owed them. These included repossession, wage garnishment, and foreclosure. Other major "last straw" reasons were medical, divorce, taxes and litigation.

Other Findings Included:

No Other Solutions. More than 58 percent of the respondents said they believed they had no choice but to file for bankruptcy or were not aware of any other alternatives. There was no real consensus among the balance of the respondents as to alternatives to bankruptcy.

Easy Process. More than 80 percent of the respondents said they found the decision to file a difficult one but nearly two thirds said the process itself was relatively easy.

Some Repeaters. One of the more disturbing findings was that for a significant minority this was not their first bankruptcy. The majority, 86.7 percent, had never filed before. But of the remaining 45, 30 had filed twice before, five had filed three times and one had filed 10 times.

Counseling Resources Unused. One of the most surprising findings of the survey was the relatively small number of individuals who sought credit counseling before deciding to file for bankruptcy. Only 49 percent of the respondents sought professional debt counseling prior to filing.

Attorney Influence. Attorneys have substantial influence over many of the critical decisions individuals make in deciding whether to file for personal bankruptcy. This includes both the decision to file and the type of filing made.

Bankruptcy Stigma. A substantial majority of filers had not been able to reestablish credit and nearly a quarter of the respondents still owed income taxes after the bankruptcy was filed.

More than half reaffirmed at least some of their outstanding debt although only 17 percent said they reaffirmed credit card debt under an agreement that allowed them to keep their cards

Conclusions

One of the most important conclusions to be drawn from this study is that there is an opportunity for the bankcard industry to positively impact the upward trend in personal bankruptcy filings, but action will have to be taken on several fronts.

Education. Experience clearly shows that Members can reach consumers and educate them about the negative aspects of bankruptcy, their option to file under Chapter 13 rather than Chapter 7, and the availability of consumer counseling and other alternatives to bankruptcy. Visa and MasterCard are currently testing radio, print and television advertising aimed at getting consumers to seek counseling before they consider filing. The goal is to make bankruptcy a last resort and not the first option.

Working with Filers. Some Members have already developed programs to encourage consumers to either not file for bankruptcy in the first place or to exclude or reaffirm their credit card debt after they've filed. Programs such as reinstatement of credit card privileges would provide an attractive incentive for filers who agree to reaffirm their credit card debt.

Legislation. A National Bankruptcy Review Commission appointed by the President and Congress is currently evaluating the need for additional bankruptcy legislation and/or changes to the existing legislation. The Visa-MasterCard Legal Advisory Committee has agreed on a list of 17 amendments the industry will propose to the Commission for their consideration and comment.

For more information about the bankruptcy survey or legislative initiatives, Members may contact Steve Holiga, Visa U.S.A. Risk Management at (415) 432-1164.