Volume 2, Number 4
|Table of Contents|
Bankruptcy Debtors: Who Are You?
Consumer bankruptcy attorneys everywhere had a pretty clear picture of who their clients were. How much they made, how much they owed and how best to try and help them deal with insufferable debt loads. That was until October 17, 2005.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) radically changed the rules of bankruptcy. The question became, how would this effect consumer filings? Who would still file? Would they somehow look different then they did prior to the law's change?
These questions were taken up by the Institute for Financial Literacy (IFL), a non-profit financial literacy organization based in Portland, Maine and whose mission is to make effective financial literacy education available to all American adults. The Institute expanded its mission with the passage of the BAPCPA by becoming an approved provider of the credit counseling and financial management instructional course (also referred to as "debtor education'.)
The answers may be a bit surprising, but this information may prove valuable to consumer bankruptcy attorneys as they move forward and try to assist an ever growing financial strapped population.
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
BAPCPA incorporated a new requirement that individuals must first complete mandatory credit counseling in order to be eligible to file a consumer bankruptcy case under the bankruptcy code 1 . This new section reads as follows; “an individual may not be debtor under this title unless such individual has, during the 180-day period preceding the date of filing of the petition by such individual, received from an approved nonprofit budget and credit counseling agency described in section 111(a) an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis 2 .”
In addition, the new law requires that certain debtors in the bankruptcy system must complete a mandatory financial management instructional course in order to receive a discharge of their debts. 3 A married couple filing a joint bankruptcy petition must each complete credit counseling prior to filing and a financial management instructional course prior to discharge as a result of the law’s application of these requirements to “individuals. 4 ”
It’s worth noting that during the multiple attempts to pass BAPCPA into law, much rhetoric and little comprehensive research was cited with regard to the demographics of consumer debtors. We heard much about ‘abuse’, high income filers and hidden assets with little to back up these claims.
During the development of its credit counseling service the Institute for Financial Literacy incorporated a research component into its delivery platforms to allow large scale data collection and facilitate the establishment of research into the demographics of the consumers considering filing bankruptcy (those seeking credit counseling.) This would allow a meaningful analysis of what changes BAPCPA would have on those consumers seeking bankruptcy protection as well as set baselines for future research.
So What Did We Find?
During the first and half months, five thousand and ninety four (5,094) clients of the Institute volunteered to complete a survey. This compared with nearly 138,000 new bankruptcy cases filed nationally between October 17, 2005 and March 31, 2006 gives us a statistically valid sample. If all of these respondents filed bankruptcy petitions 5 , this would represent 4% of all new cases filed for the period.
There appears to be a gender split with 53.8% indicating that they were female, while 46.2% were male. In comparison, the current ratio of the United States is estimated 51% are female and 49% male.
It is in age that we begin to see some interesting numbers appear. There is a distinct bell curve with potential debtors, starting with the 25-34 year age range (22.7%), topping out with the 35-44 year age range (28.6%) and slopping back down with the 45-54 year age range (22.4%).
One statistic which may cause concern is the percentage of senior citizens who are considering seeking bankruptcy protection. The Institute’s survey found 8.9% of the respondents were over the age of 65 years. Though this is still below their percentage of the U.S. population, in previous research conducted by the United States Trustees Program the percentage of seniors filing bankruptcy protection was found to only be 4.4% of their sample. 6 Attorneys may find themselves dealing with an aging clientele and need to address concerns other then debt elimination.
Table 1: Comparison of Age Group Data
Many who have not suffered financial hardship maybe quick to judge those who have. They may question the intelligence of an individual in financial distress and even wonder “What’s so difficult about this? Didn’t they learn this in school?” The following looks at the educational levels of respondents and compares them to the U.S. population.
Table 2: Education
In response to the question of whether or not students do learn basic money management in school, the Jump$tart Coalition for Personal Financial Literacy administers a nationwide biennial survey to measure the financial literacy levels of high school seniors. In the 2005-06 survey, the results revealed an average score of 52.4 percent, a failing grade by most measures.
There wasn’t a day that went by during the BAPCPA debates that income levels and means testing (a topic for another day!) didn’t come up. So what do post-BAPCPA clients earn? Surprisingly much less then you would think.
Table 3: Self Identified Income of IFL Respondents
So with income levels so low, did we find that rates of unemployment were high? Almost three times the national unemployment rate! The other number which was of interest was the percentage of respondents who indicated that they were retired, 10.5%. Again this seems to indicate attorneys will be dealing with an aging clientele and may need to adjust their practice to accommodate the needs of these clients.
Table 4: Employment
Causes of Financial Distress
Lastly we will examine the common causes for financial difficulty. During the credit counseling process clients were asked to pick from a list of causes of financial distress. Clients were encouraged to choose more than one cause when describing their situations and therefore the percentages will equal more than 100%. The table below shows the results:
Table 5: Causes of Financial Distress
Some of the results were not to be unexpected, such as a high percentage indicating that they were “Overextended on Credit” and suffered from “Unexpected Expenses.” Where some interesting results emerged were with the “Illness/Injury” result at 30.9%. Though most attorneys know from experience that many of the clients they have helped suffered financial devastation due to medical bills, to see an actual result of over 30% puts this into perspective.
“Reduction of Income” along with “Job Loss” shows the harsh effects the “changing economy” has had on many. No doubt there will be much to study for economist and sociologists for years to come.
Another somewhat concerning result was the number of respondents who chose “Retirement” as the cause of their financial distress. With 4.8% choosing this, it was one of the lower responses, but this factored in along with the other findings around age and retirement there begins to be drawn a frightening picture for American senior citizens.
The Institute for Financial Literacy plans to continue its research on consumer bankruptcy demographics and will be publishing another report on the one year anniversary of BAPCPA. The goal being that as ongoing and future policy discussions ensue around bankruptcy there will be meaningful demographic information available about those who are most directly affected, the consumer.
Meanwhile as bankruptcy attorneys adjusts to the changes the new law brings, hopefully the information found here will help them better understand who these clients are and how better to reach out and serve them.
Institute for Financial Literacy
1 Title 11 USC
2 11 USC sec. 109(h)(1)
3 11 USC sec 727(a)(11) and 1328 (g)(1)
4 11 USC 302
5 97% of credit counseling clients received a recommendation to consult an attorney based upon their financial condition.
6 See Ed Flynn and Gordon Bermant, A Closer Look at Elderly Chapter 7 Debtors, 21 ABI Journal 3 (April 2002).
7 US Census Bureau collects data from ages 15-19 and 20-24, only the 20-24 data was used.