WASHINGTON – In her 15 years in the auto loan business, Betty Alexander saw plenty of people go on spending binges only to declare bankruptcy to avoid paying their bills.
“People make a living out of it. They file for bankruptcy every seven years,” said Alexander, 67.
But the Charles County woman has also seen bankruptcy from the other side, having been forced by divorce and illness to file for protection twice since 1978.
Alexander agrees that bankruptcy reform is needed, but she worries that people may think she and other who sought refuge in bankruptcy court as a last resort are deadbeats.
“They do need to tighten up rules, but they might wind up hurting some of the people who really need it,” Alexander said.
But opponents fear that those people who really need it are the ones who will be hurt by bankruptcy reform bills that are expected to move toward final approval after Congress reconvenes this week. The House and Senate have each passed bills and President Bush has said he will sign reform legislation if the two chambers can iron out differences and get a measure on his desk.
Supporters of reform insist there are safeguards for the neediest debtors, and that it is high time to stem the flood of bankruptcy filings.
“We should not treat bankruptcy as a get-out-of-debt-free card that can be used by tens of thousands of filers every month, with virtually no questions asked,” said Dean Sheaffer, a vice president in charge of credit for Boscov’s Department Stores, in February testimony to the Senate Judiciary Committee.
Credit card companies and mortgage lenders led the push for bankruptcy reform after an explosion of new bankruptcy filings in the 1990s.
Chapter 7 bankruptcy filings in Maryland rose from 5,500 in 1989 to 26,000 in 1998, before falling to 22,400 in 1999, according to the Department of Justice. Bankruptcy filings nationwide jumped from about 350,000 to 1.4 million a year in the last 15 years, according to the U.S. Chamber of Commerce.
The proposed reform would make it harder to file for Chapter 7 personal bankruptcy protection, which allows people buried in debt to wipe the slate clean. Instead, it would steer more people into Chapter 13 filings, where they would have to follow court-approved debt-repayment plans. A person who made enough money to repay at least 25 percent of the debt in five years would likely be required to file for Chapter 13 under the measures pending in Congress.
The reform plans would also require that people get debt counseling before claiming bankruptcy, a provision that Greenbelt attorney John Burns calls an “absurdity” because it could shut out people who need bankruptcy protection in a hurry to stave off an imminent eviction or foreclosure.
“People who file for bankruptcy tend to be poor planners,” Burns said. “They’re coming to you as a last resort.”
While Sheaffer agrees that bankruptcy must remain an option for people so buried in debt they have no other means of recovery, he said too many people see bankruptcy as a “first step rather than a last resort” for dealing with debt. He said Boscov’s, which has stores in Maryland, Pennsylvania and three other states, had to write off $3.5 million in debt last year from customers who filed for bankruptcy protection.
“Why are so many people asking the court to make others pay their debts for them?” Sheaffer asked. “Why aren’t they ashamed to go into bankruptcy court?”
But attorneys who handle bankruptcy cases said most of their clients feel awful about being forced to file.
“The feel embarrassed, ashamed, like they are moral lepers,” said Upper Marlboro attorney George Blumenthal. “Some of them feel like they are committing a sin because they are not paying their bills.”
Blumenthal said he’s seen bankruptcy save the marriages and even the lives of some clients who were close to suicide because they saw no other way out of their debts.
Burns said 99 percent of his bankruptcy clients are not deadbeats. They may have just lost a good-paying job or may have a sudden illness. Often they fall behind in high-interest credit card bills or they get lured into a home- equity loan they can’t afford, problems that Burns said bankruptcy reform does not fix.
Alexander said she filed for bankruptcy in 1978 after divorce left her broke and deeply in debt. That helped her get back on her feet, and a few years later she was making good money in the “car business,” lining up loans for other people.
But the money went out as fast as it came in — although Alexander’s problems do not include credit card debt — and Alexander failed to pay all of her federal income taxes one year. She ignored the problem for years and the interest and penalties piled up, until she owed the Internal Revenue Service $93,000.
“An IRS lady appeared at the door and I said, `Oh lordy, here comes the handcuffs. I’m going to jail,'” Alexander said.
She didn’t go to jail, but her situation got worse when her mother died and then, three years ago, Alexander suffered a stroke and her health insurance didn’t cover all the medical bills. Soon both the IRS and an area hospital were garnishing her wages, leaving her little extra to live on.
“It just threw me so far behind there was no way I could catch up,” said Alexander, who was lying awake at night wondering who was going to sue her.
Bankruptcy was her only relief, although she said she felt ashamed both times she had to file.
“It’s a bad thing, it really is, to go through it. It’s very demeaning,” Alexander said. “You feel like you are such a low-life person if you’ve done it.”
Alexander is now recovered from her stroke and helps run a restaurant. Her bankruptcy petition, which is scheduled to be approved in May, will not be affected by the reform proposals, but she says now she is glad she had the option of filing.
“I have not tried to beat it,” Alexander said. “I’ve tried to work our my problems, but when things overwhelm you, you have to have a way out.”