Filing for Bankruptcy Might Not Get Lenders Off Your Back
Faced with a soaring rate of personal bankruptcies throughout the nation, credit card issuers, department stores and other lenders are becoming much more aggressive in dealing with debtors in court, according to bankruptcy attorneys and some of the creditors themselves.
Creditors are aiming at consumers who run up extra debt just before filing, but much of the new aggressiveness is nothing more than “being better about getting every little bit they are entitled to under the law, instead of just walking away from it the way they used to” three to five years ago, said Jerry S. Dunietz, a Rockville, Md., attorney specializing in bankruptcy.
Many lenders agree. “Bankruptcy is an adversarial system, and if the [creditor] is not an active adversary, then whether the debt is dischargeable or not, it will be discharged. I think it has been our objective to get our members to be more active adversaries and to go after” debtors who could pay, said Kenneth R. Crone of Visa USA Inc.
Lenders say they see no alternative. Bankruptcy filings have reached record levels--topping 1 million last year--and lender losses are climbing correspondingly. Visa and MasterCard International Inc. alone are losing more than $8.5 billion a year to debtors, of which $2.5 billion represents fraud or abuse, meaning that the debtor could pay but doesn’t, according to an estimate by Visa USA.
In some cases, creditors are pushing the envelope, seeking to persuade or even intimidate debtors into agreeing to keep some of their debts--a process known as reaffirmation--rather than having them wiped out in the bankruptcy proceeding. This is more important as more customers use Chapter 7 bankruptcy rather than the more mild Chapter 13, in which creditors are more likely to collect at least a small amount of what is owed.
Last year, a bankruptcy judge in Missouri blasted AT&T; Universal Card for effectively accusing two debtors of fraud to try to force them to agree to pay off their card balances. The company had entered a “complaint to determine dischargeability of debt” accusing one woman of making purchases on her card and obtaining a cash advance when she was already in financial trouble. Faced with this complaint, she agreed to pay off her $3,257.50 debt at $100 a month, even though her bankruptcy filing showed monthly income of $966.33 and expenses of $982.66.
When the judge indicated he would refuse to approve the arrangement, making it unenforceable, AT&T; withdrew its complaint, saying it wasn’t worth pursuing. It also backed down in the other case.
“As acknowledged by counsel,” wrote Bankruptcy Judge Arthur B. Federman, “AT&T; had no plans to ever prove that the allegations in its complaints were true. Instead, these complaints were filed solely to extract a settlement from debtors. Once AT&T; realized the cases would not settle and that it would actually be required to offer evidence to support the allegations in the complaints, it moved to dismiss.” Proving a consumer knew he or she was in financial trouble and intentionally piled up more debt before filing is generally difficult.
An AT&T; Universal spokesman said, “We disagree with both the representation of our program and with his decision in the case.”
Federman cautioned his colleagues to “review agreed-upon judgments with some care” because many debtors are represented by attorneys who work for flat fees and thus may be inclined to agree to an easy settlement.
But if the attorney is charging an hourly rate, a tenacious creditor can force the debtor to run up legal bills that exceed the debt at issue.
“What we are seeing is where there is a question about whether a creditor should proceed against a debtor, they are opting on the side to proceed,” said David E. Lynn of the Washington firm of Docter, Docter & Lynn. “I am surmising that they have been met with enough success that it is encouraging them to do even more of this.
“We have seen increased aggressiveness by creditors and their attorneys. I think there is a perception if they shake enough trees, some money will fall. They are aware that they are in an advantageous position because they can afford to pay their attorneys and the debtors can’t,” Lynn said. Debtors are “put in position where they have to settle for lack of ability to pay the defender.”
If you are in trouble, but still have income, there are things you can do. First, cut your spending and approach your creditors, explain your situation and ask about a workout deal. If they are uncooperative, the nonprofit Consumer Credit Counseling service ([800] 388-2227) may be able to help.
If you must file, know your rights. There are books on bankruptcy available at public libraries. You generally can file for complete liquidation of your debts, Chapter 7, or for a payment arrangement under Chapter 13 of the code.
Check your records. If you owe a creditor more than $1,000 for luxury goods or services or a cash advance obtained within 60 days of the filing, there is a presumption of non-dischargeability, and the burden will be on you to prove it wasn’t obtained fraudulently or on false pretenses.
Think carefully about debts you might want to reaffirm, and talk to an attorney about your obligations. You should pay your debts if you can, but if you can’t, bankruptcy is meant to give you a fresh start. Make sure you get it.
