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.
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