It's a hangover of massive proportions, the morning-after headache for those who spent, spent, spent in the '90s and it soon may get worse.
The sign of this hangover is bankruptcy, an increasingly common affliction. Nationally, bankruptcy filings hit an all-time high in 2001, with 1.49 million filings, up 19 percent from 2000. In Kansas, consumers were seeking protection at record rates, too. Nearly 14,000 filed for bankruptcy protection in 2001, up from approximately 11,300 a year earlier.
Consumer credit professionals aren't surprised by the numbers.
"A lot of people in this country are suffering the hangover of excessive debt buildup in the 1990s," Robert Baker, a Lawrence credit counselor with Housing and Credit Counseling Inc., said. "That's why we're seeing such a dramatic increase in bankruptcy filings."
But many in the banking and credit card industry say the pain of bankruptcy isn't what it used to be. Industry lobbyists have taken their case to Capitol Hill, telling Congress that current bankruptcy laws too easily allow consumers to simply wipe away unsecured debt, like the kind racked up on credit cards.
Now that talk in Washington, D.C., has started to turn back to domestic matters following Sept. 11, lawmakers are listening. Rep. James Sensenbrenner Jr., R-Wisconsin, chairman of the House Judiciary Committee, recently predicted a major bankruptcy reform act that has been stalled in a conference committee for more than a year, will begin moving forward again by the end of March.
Consumer advocacy groups and the banking industry are divided on the merits of the bill, but everyone agrees on one point the safety net of bankruptcy wouldn't be nearly as safe.
Passing a test
A key provision of the proposal is that consumers would have to pass a much more stringent test before they could erase their credit card and other unsecured debt through a Chapter 7 bankruptcy proceeding.
The new test would require consumers to keep paying on their credit cards if they have a monthly income that would allow them to repay at least 25 percent of their unsecured debt over a five-year period.
Today about 75 percent of all people who file qualify for Chapter 7 protection, allowing them to simply erase all or most of their unsecured debt.
Baker said under the proposed system, only the poorest of the poor will qualify.
"It will be much, much harder to dismiss their debt, because you would almost have to have next to nothing in terms of income to qualify," Baker said.
Russell Cloon, a bankruptcy attorney with Baldwin's Cloon Legal Services, said it's hard to overstate the consequences of the bill for consumers who have gotten themselves into a financial bind.
"In its present form, it would just be a disaster for debtors," Cloon said.
Cloon said a major problem with the bill is it would use Internal Revenue Service expense guidelines in determining what a family's monthly expenses should be. Cloon said those often aren't entirely accurate.
For example, he said many of his Douglas County clients would be expected to pay no more than $700 a month in housing costs, using the IRS expense table.
"If your actual expenses are quite a bit different than what the IRS says they should be, you have quite a problem," Cloon said.
"You might be required to come up with $500 or more a month out of thin air to pay off your credit cards."
The bill also would require anyone seeking to file bankruptcy to first go through a 90-day waiting period when they would receive credit counseling services.
"The proponents say it gives people a chance to work out a repayment plan, but the reality is the credit companies and banks want a 90-day cushion to repossess your car or house," Cloon said.
The new law would make people's homes fair game as well. Currently, Kansas is one of only five states that allows the "homestead exemption," which stops creditors from forcing homeowners during bankruptcy to sell or refinance their house to pay off debt. The other states are Texas, Florida, Iowa and South Dakota. The proposed law would eliminate that exemption.
'Righting the ship'
Bankers and credit card companies are not predicting nearly as much doom and gloom if the bill becomes law. Instead, they say it will just be a return to days when consumers must meet their financial responsibilities whenever possible.
"Our side of this is that we're in favor of any legislation that makes people who are able to pay their debts pay them," Chuck Stones, senior vice president of the Kansas Bankers Assn., said. "We think that is what this proposed legislation does."
Stones said the increasing number of bankruptcy filings comes at a price to banks and other businesses who often times must forfeit ever being paid for many loans or sales they have made to consumers. Stones said he did not have specific figures on the losses Kansas banks suffer because of bankruptcy but said they were significant.
"When you have someone who borrows someone else's money and promises to repay it and then doesn't, obviously the person who loaned the money is taking a loss," Stones said. "I can guarantee you banks are taking losses on this."
Some of those losses may be inevitable under any system, but Stones said they shouldn't be as prevalent as they are today.
"We understand the bankruptcy laws attempt to help people get back on their feet, and that is fine, but over the years the laws have been so far skewed to the debtor's advantage that we think this just starts to right the ship," Stones said.
Stones said he was confident that the proposed changes wouldn't ruin the lives of innocent people who have suffered financial hardships through no fault of their own, like people who rack up large debt through needed medical procedures that their insurance refuses to cover.
"I think people who are truly caught in catastrophic situations are going to get taken care of under this bill," Stones said.
If the bill isn't approved, Stones predicts bankruptcy filings will continue to increase.
"Part of the reason for the increase is the economy, but part of it is the current law allows them to take advantage of the situation," Stones said. "And lots of them would rather take advantage of the situation instead of sitting down and looking hard at themselves, changing their lifestyles and reminding themselves of their responsibilities."
President Bush has indicated support of bankruptcy reform, but Baker said there probably still will be a battle in Congress before it gets to the president's desk.
Baker said many consumer advocates, including himself, can see where more balance needs to be struck between creditors and debtors in the current law, but he said he hopes credit card companies and other lenders also will accept some of the blame for the increase in bankruptcies.
Consumer protection groups are pushing to require credit card companies to put warning statements, a financial warning equivalent to the health warning on cigarettes, on all their solicitation material.
"We should have better financial literacy before we start accruing debt," Baker said. "People need to understand the risks. Teen-agers often times are offered credit before they understand it, and that is not good.
"And part of the problem is creditors just give credit to people too liberally."
Cloon, who calls the credit card companies' policies for issuing new cards "ludicrously loose," isn't optimistic consumers will win the battle on Capitol Hill.
"I think the changes are probably going to happen," Cloon said. "There's just too much money. The banks and credit card companies have powerful lobbies. The people I represent have a hard time making their house or car payments, so they're not sending lobbyists to Washington, D.C."