Kai Ryssdal: From American Public Media, this is Bankrupt: Maxed Out In America, a documentary from American RadioWorks and Marketplace. I'm Kai Ryssdal.
Americans have been filing for bankruptcy in bigger numbers than ever. Congress recently passed a sweeping new law to crack down on bankruptcies. And in the coming hour we'll look at what's behind the boom in going bust. First, this news update.
Kai Ryssdal: This is Bankrupt: Maxed Out In America, a documentary from American RadioWorks and Marketplace on American Public Media. I'm Kai Ryssdal.
Americans are going broke in record numbers. Over the past decade, 15 million people declared bankruptcy. That's better than double the figure from the previous decade. Put somewhat differently: in the early 1980s, two percent of households filed. By the early 2000s, bankruptcies had risen to eight percent. Last year Congress overhauled the bankruptcy system to stem the tide of filings. Things got heated on Capitol Hill:
Ryssdal: On April 20, 2005, President George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act into law. The bill was meant to put more money into the hands of creditors, and crack down on filers. Were the lenders right? Are we becoming a nation of deadbeats? Or are skyrocketing bankruptcy rates a symptom of deeper turmoil in the American economy?
The same forces shaping our economy are shaping what it means to go broke in America, from global competition to rising medical bills. And how we deal with financial failure shows what kind of society we are and what we truly value.
Over the coming hour, correspondent Chris Farrell looks at what's fueling the bankruptcy boom. He begins his journey with a visit to Memphis, America's bankruptcy "capital":
Chris Farrell: There's a black glass skyscraper in the heart of downtown Memphis locals call the bankruptcy building. On the 11th floor, in what looks like a clean bus terminal waiting room, hundreds of walk-on characters play their brief parts in the bankruptcy drama. There are rows of grey plastic chairs. Lawyers huddle with bankrupt clients. They're here to negotiate deals with federal trustees to pay off as much of their debt as they can. Some people say bankruptcy is part of the culture in Memphis. One lawyer even jokes about it:
Trustee George Stevenson sits in front of a computer and pulls up one of 30,000 current cases. At his elbow are a middle aged woman and her lawyer.
Without a mortgage payment, she can catch up on her other bills. The meeting takes a little over a minute. A young woman in a sweat suit and her lawyer are next.
Stevenson listens to story after story. There's a father whose drug addicted daughter drained him of money. A woman with a failing drapery business. A mechanic behind on his house payments. In each case, Stevenson makes suggestions and offers encouragement.
The morning session winds down. Stevenson reflects on the people he sees each day in bankruptcy court.
The most common kind of bankruptcy in Memphis is called Chapter 13. Debtors repay what they can from wages over five years. Meanwhile, they can hang onto their house and car.
Chapter 13 bankruptcy has deep roots in Memphis. It was created by a local Congressman in 1938 to help farmers hold onto their land during the Great Depression. Credit card companies, auto lenders, and other creditors like Chapter 13 repayment plans because they collect more money than they would from the other solution-Chapter 7 bankruptcy. Under Chapter 7, debtors usually get to keep their homes, but the rest of the debtors' property and assets-like cars and big screen TV sets-are sold off to pay unsecured creditors. There is no repayment plan. When the assets run out, most remaining debts are cancelled, although there are some debts you can't get rid of, such as student loans, child support, and alimony. Chapter 7 or Chapter 13, bankruptcy is a safety net for anyone strapped with too much debt.
David Kennedy is the chief bankruptcy judge for western Tennessee. He's a 25-year veteran of the court. Over those years, Kennedy's seen more and more scared, embarrassed people in his courtroom asking for financial relief. He believes the rise in filings results from a toxic brew of economic insecurity, personal catastrophe, and plenty of debt. Kennedy says many workers live on a financial precipice.
And it's not just the working poor who go bankrupt. Middle income folk and well-paid professionals count among the filers. Intense global competition and dramatic technological leaps often leave workers behind.
When money is tight, setbacks are costly.
Then there is debt. Lots of it. It starts out with a more appealing name: credit. Historian Daniel Boorstin quipped that the American standard of living was bought on the installment plan. Still, three decades ago it was much harder to borrow money than today. Americans are bombarded daily by pitches for car loans, mortgages and credit cards.
The so-called "democratization of credit" has benefited most Americans. Credit that once was limited to the well-heeled now gets offered throughout society.
Ed Yingling is president of the American Bankers Association
The modern credit economy comes with a price tag. The tab is visible in south Memphis.
Terrell points out that the businesses she grew up with, like an appliance store, are closed. Instead, high-priced lenders dominate every strip mall.
Little wonder, too. Take the payday loan business. Typically, customers write postdated checks for their loan. They return after payday and buy back the check or roll it over for another week or more. The typical fee for a $100 two-week payday loan is $15. Over the course of a year, that's a 391% annual percentage rate. With rates like that-or even higher-it's easy to get trapped in an endless cycle of debt.
That's what happened to Maria Burks. She fell behind on payments for her rented furniture.
Burks is a 29-year old, single mother of four, easily mistaken for a college student with her slender frame and youthful face. "Luscious" is tattooed in cursive on the side of her neck. Burks says she moved out at age 19 and wasn't careful about what loan agreements she signed.
She works as a customer service rep making ten dollars an hour. Her debt is equal to a year's wages, mostly for some student loans, back rent, and those furniture rental stores. Creditors were hounding her for payment.
Finally, Burks decided to file for bankruptcy.
Maria Burks dreams of finishing college, maybe starting her own beauty salon. She also wants to play her part in ending the local bankruptcy cycle. Her sister went broke. So did an older brother. So have friends.
Back in the Memphis bankruptcy building, Trustee George Stevenson continues dealing with a steady stream of people. He's mediating their cases, modifying the terms of their plans, consulting with their lawyers. Still, despite great effort by clients and the court, nationwide, only a little more than a third of Chapter 13 filers successfully complete their financial reorganization. If they can't make their payments, they could lose bankruptcy protection. Creditors could swoop back in, foreclose on their home or repossess the car.
This morning, an older woman patiently waits until her case is called, and then she approaches Trustee Stevenson with a smile. She's beaten the odds.
Stevenson and the debtor give each other a high five.
Like other places around the country, Memphis has seen bankruptcy grow as a result of economic pressures and higher debt. But social factors play a role, too. In some communities and neighborhoods, word spreads that you can get rid of your debt by filing bankruptcy. Lawyers aggressively advertise on television, offering bankruptcy as a way out of a debt hole. It's also a weapon in the arsenal of sophisticated financial advisors. Coming up, we'll profile two people with very different attitudes toward financial failure.
Our program continues in just a moment from American Public Media.
Ryssdal: You're listening to a documentary from American RadioWorks and Marketplace, Bankrupt: Maxed Out in America. From American Public Media, I'm Kai Ryssdal.
For much of history, bankruptcy was a crime. Defaulting on your debts might get you locked up, banished, enslaved, even dismembered or executed. In colonial Pennsylvania, a person who didn't pay up could be flogged while nailed to the pillory by an ear-and then the ear was sliced off. That "earmark" warned future lenders to steer clear. Debtors' prisons existed in America until the early 1800s.
In the 1800s, lawmakers across the country battled over how to treat citizens who went broke. By the end of the 19th century, the law reflected the influence of another powerful American creed: America as the land of the fresh start.
P.T. Barnum, the famous showman, lost half a million dollars in a giant swindle. He came out of bankruptcy ten years later and founded The Greatest Show on Earth. It takes risk to get rich. To try and fail and then try again was part of the American ethos. Duke University bankruptcy historian Edward Balleisen:
The fresh start is not just for entrepreneurs. In recent decades, bankruptcy has offered a new beginning to all kinds of people who get in over their heads. But while bankruptcy is often a savvy financial move, for many people it comes at a steep emotional price. Chris Farrell examines this stigma of bankruptcy.
Farrell: Law professor Todd Zywicki says there's a simple reason so many people go bankrupt today:
Zywicki says there used to be a social stigma attached to bankruptcy and he wants to bring it back. Zywicki was a proponent of the new bankruptcy law in 2005-a law meant to put more money in the hands of creditors and crack down on deadbeats.
How much abuse? No one is really sure. One reason is what some call abuse others consider using the law to one's advantage. Many judges say scam artists probably account for a fraction of bankruptcy filers, no more than 2 to 4 percent. Zywicki favors an FBI estimate of 10 percent. Whatever the actual number, Zywicki believes the new bankruptcy law is all about restoring individual responsibility.
Elizabeth Warren is a law professor at Harvard University. She was a leading voice against the 2005 Act.
Americans routinely carry a lot of debt. Total household debt climbed by 26 percent in the 2000s after adjusting for inflation. A seventh of households have debt payments that eat up more than 40 percent of their income-a worrisome sign. Bankruptcies are concentrated among households in the lower half of the income spectrum, households earning under $45,000 a year. The typical person filing for bankruptcy is a blue collar worker with a high school education. Still, according to Warren, the face of bankruptcy includes someone who went to college, had a job, bought a house. No matter what their standard of living, one of three things usually happened: a job loss, a divorce or an illness.
Marion Chase Pacheco had all three.
Marion lives in a small apartment in New Rochelle on the outskirts of New York City. She sits in a chair rigged with cushions for her bad back. When she was a college student, a truck hit her. Now, she can't stand for very long. She'd been a teacher, but her back troubles made her think she needed a new career-one she could do from a wheelchair if necessary. She was living in Syracuse, New York and applied to law school at Syracuse.
The price tag for her law degree was $60,000 in student loans. She and her husband, a doctor, had already taken on a lot of debt to send their three children to private colleges. But Marion figured she could pay it back once her career took off. She began practicing employment law:
Marion wasn't earning much, and her marriage was unraveling. When she and her husband divorced, Marion said there wasn't much to split but debt. Her financial problems started to mount. She moved down to New Rochelle after she met a new partner, thinking there'd be better job prospects for a lawyer in the Big Apple. But there weren't.
To top it off, Marion was deep in hock for medical bills for her back, credit cards, and student loans.
Marion was so broke she ended up representing herself in court. During that time, she kept an audio diary for us.
With the bankruptcy pending, Marion continued to look for a job. She hoped she'd pick up work as a bankruptcy attorney. She figured there were lots of people in financial trouble. But her ad in the Yellow Pages didn't lead to a single client. A few months later, another blow came:
Two months later, Marion got some better news. Her partner had landed a new job, and his health insurance would cover her. Bankruptcy had ended most of the calls from creditors.
Pacheco: There were some people there that really I felt never deserved to get paid anyway [laughs]. There was one credit card company-they were just awful. And I was glad to write off. Other people I didn't feel that good about. I wished I'd been able to pay them, and maybe someday I will. I don't know. But it's good just to have them off my back.
Still, the bankruptcy didn't clear up all of Marion's debt problems. By law, bankruptcy can't get rid of her student loans, which total $100,000 for herself and her kids. Marion has decided even with a bad back she can teach. She'd like to work with kids in the Bronx.
Now 57-years old, Marion is a substitute teacher. She has no retirement savings. She calculates it will take her until she's 90-years old to pay back her student loans. Not much of a fresh start.
Bankruptcy was only a partial solution to Marion Chase Pacheco's problems and a painful one for her. But not everyone shares her sense of shame.
Tom Fordham lives in rural Vermont, about an hour outside Burlington, near a place called "Smuggler's Notch." A stream winds along the roadside.
The area's mountain passages and caves were once popular with smugglers. Now, it's hikers and skiers that ply its picture postcard trails. Tom rents a modest townhouse nearby with his wife and her 12-year old son. They left Long Island for Vermont following 9/11. An information technology worker and self-confessed computer geek, he felt at home here.
Tom says he's always been something of an outsider, a rebel against authority. Take the name of his Yahoo group Web site: "Smash-the-state". But even a rebel needs a job. Tom moved up here without one, and had a hard time finding high tech work in Vermont.
To make ends meet, he cashed out his pension and relied on credit cards.
Tom ended up with $40,000 on four cards. The debt went for nothing extravagant: groceries, gasoline, and other living expenses. Even after finding part-time work at a nearby college, he continued to make just the monthly minimum payments. The house of credit cards tumbled down when he missed one payment. A week later, he paid over the phone, but it was too late.
A credit card's default interest rate is around 30 percent. Worse, about half of all issuers now impose a universal default policy hidden in the fine print of a credit card agreement. Late on any payment to any creditor, and the rate on the card could automatically jump to the default rate. That happened to Tom. Suddenly, he owed $30,000 at 30 percent on two cards, plus another $10,000 at a lower rate. The default rate outraged him.
Here's an illustration of the debt hole Tom was in. To pay back the $30,000 at 15 percent interest, he'd have to make the $800 minimum payment every month for almost four years. He'd pay $11,000 in interest. But at his new rate of 30 percent, it would take nearly ten years and $62,000 in interest.
Creditors hounded him. Tom's family stopped answering the phone. Collection agencies left messages on their answering machine.
Tom decided to file for bankruptcy. He says he wasn't ashamed to do it. It was a business decision.
Americans like Tom are borrowing less from the local banker or neighborhood merchant who lives down the street and attends school plays. No, millions of people have embraced impersonal credit cards issued by giant corporations. Tom is a digital byte, a data point housed in complex algorithms.
Tom contacted a lawyer.
He says the thought of bankruptcy made his wife, Heather, nervous. She was pregnant and wanted to buy a home for their family.
Heather thought filing bankruptcy would mean never buying a home or a car. Tom persuaded her it would be better to get off the debt treadmill or they'd never get ahead. Finally, they agreed. He'd file bankruptcy on his own in early October. Tom didn't tell his parents. He says he didn't want them to offer to help.
Four months later, I return to Vermont. Tom's part-time job at a local college has turned into a full-time gig with benefits. When I arrive he shows me the day's mail.
Contrary to popular belief, people who file bankruptcy do not become credit lepers. Far from it. They're flooded with loan offers, albeit at higher than normal interest rates. One attraction for creditors? You can't file for bankruptcy again for another eight years.
Maybe the reason money is still tight is the other big change in Tom's life: a baby.
Heather Fordham brings baby Alexandra home from daycare.
Heather settles the baby on her lap with a bottle.
Tom and Heather say they hope to be able to buy a home in the next few years. Bankruptcy was probably a good move for them. But if bankruptcy is such a good deal, why don't more people do it? That was the question economist Michelle White of the University of California San Diego wondered.
Several years ago she calculated that at least 15 percent of households would have benefited from filing for bankruptcy compared to the one percent that actually filed.
Stigma may have eroded, but most Americans will work hard to stay out of bankruptcy court.
Ryssdal: I'm Kai Ryssdal. You're listening to an American RadioWorks and Marketplace documentary, Bankrupt: Maxed Out In America. To read Chris Farrell's thoughts on bankruptcy and morals in America, visit our Web site at AmericanRadioWorks.org. There you can see photos from this story and tell us if bankruptcy has affected your life. That's at AmericanRadioWorks.org.
Coming up - A bankruptcy judge runs out of patience:
Major funding for American RadioWorks comes from the Corporation for Public Broadcasting. Sustainability coverage is supported in part by the Kendeda Sustainability Fund of the Tides Foundation, furthering values that contribute to a healthy planet. Our program continues in just a moment, from American Public Media.
Kai Ryssdal: This is Bankrupt: Maxed Out in America, an American RadioWorks and Marketplace documentary from American Public Media. I'm Kai Ryssdal. When Congress overhauled the nation's bankruptcy law last year the mantra was, "Too many deadbeats." Creditors, especially credit card companies, waged a multi-year multi-million dollar lobbying campaign. The law passed with 70 percent of Congress voting yes.
The Bankruptcy Act is more than 500 pages long. It makes filing more difficult and expensive. There's more paperwork. Everyone has to visit a credit counselor. And more people will be forced into Chapter 13 repayment than Chapter 7 liquidation, meaning fewer people can walk away from what they owe. Under the new law, you can only file for a quicker and cheaper Chapter 7 if you make less than your state's median income.
The law went into effect on October 17, 2005, and debtors panicked.
The filing boom went bust after the deadline. But with the passage of time, personal bankruptcies are climbing again. Chris Farrell wonders whether the new law will really cut down on filings, or whether a carrot might work better than a stick.
Farrell: It seems like a paradox. When times are better, more Americans file for bankruptcy. When incomes rise people are more willing to take risks. Optimistic lenders turbo charge the economy with credit. Take the Roaring '20s, when bankruptcies roughly quadrupled. Instead of saving up to buy radios and refrigerators, families bought on the newfangled installment plan. It was an early version of "buy now pay later," says Edward Balleisen of Duke University.
The next surge in filings-this time a six-fold gain-came during America's economic Golden Age, the '50s and '60s.
After 1985, came an era of rapid technological change, relatively low unemployment, and the further democratization of credit. And personal bankruptcies rose five-fold.
The new law doesn't squelch the availability of credit-far from it. It could even encourage credit card companies and other lenders to loosen their standards more. No, the idea was to cut down on Chapter 7 liquidations. But some economists are skeptical about whether it will. Economists like Michelle White at UC San Diego.
Yes, debtors with high earnings will find the stringent Chapter 13 repayment requirements unappealing. It won't be as easy for multimillionaires to shelter assets in mansions bought in states with high homestead exemptions, such as Florida and Texas. But the majority of filers live below their state's median income. Nationally, that figure is under $45,000. Again, Michelle White:
So the law may not turn out to be a profit boon to the credit card companies that pushed for it. And it may not cut down on filers, says Elizabeth Warren of Harvard University:
The jury will be out on the overall impact of the new law for years to come. But a growing number of fed-up bankruptcy judges aren't waiting for history's verdict.
Judge John Ninfo II is a tough-talking bankruptcy judge in Rochester, New York. To him, the basic problem is too many Americans don't build a financial cushion against those times when bad things happen to good people.
Ninfo energetically argues his case. He grabs a folder. It's the file of a teacher making $72,000 a year. She's about to file for Chapter 13.
He reaches for another file. This one is from a couple with an income of over $60,000.
Empathy doesn't seem part of Ninfo's vocabulary. He's a former Marine. His office is crowded with American eagles and military mementos.
Yet during our conversation, Ninfo reveals a different side.
Ninfo isn't one to sit around. He decided to battle financial trauma with CARE, a program he created four years ago. The name stands for Credit Abuse Resistance Education-sort of a "Scared Straight" credit program for students.
He started in local high schools and colleges. Now he's convinced judges, trustees, and lawyers in 28 states to volunteer in schools, bringing real-world stories from bankruptcy court to kids getting their first credit card offers.
Ninfo's wife teaches drama in this Rochester suburb. We drive past her car in the parking lot.
The students are rehearsing for the opera Aida.
Six student thespians take a break to sit with Judge Ninfo in a conference room.
Ninfo asks if they remember the points he stressed. Avoid using credit cards. Pay cash. Paying bills means paying them in full each month, not just making the minimum payments. Know the difference between wants and needs. And save money and build a cushion to protect yourself.
These juniors and seniors are all college-bound. Yet none of them say they talked with their parents about money before the judge raised the issue.
The CARE program is new. But surveys on the effectiveness of teaching financial literacy to high school students suggest the most important message they absorb is about the true cost of credit. That message is something many adults still need to learn, too. And Beth Dixon hopes to help them learn it. Dixon has been working with residents of public housing in Memphis. She's trying to keep them from declaring bankruptcy for trivial reasons.
Dixon runs the RISE Foundation, an anti-poverty initiative. RISE is fighting a culture of bankruptcy that exists in some neighborhoods by teaching low income families the basics of money management. The organization is part of a nationwide web of nonprofits that encourages families to save. The incentive? For every $1 a family saves another $2 goes into their account. Typically, they're striving to buy a home.
Dixon takes me to meet Annika Graham, a RISE graduate.
Graham is 34, and a single mother of four. She has a broad smile and stands tall in high-heel boots. Graham recalls the year and a half it took her to save for her down payment:
She stuck with it. Now, her mortgage is less than she used to pay in rent. Her children are thrilled at moving from a three bedroom apartment to a six bedroom house. They're living in a better neighborhood where her kids fish at a nearby lake.
Graham says her jump to homeownership has inspired her kids.
But Freeman is a little wary.
There are people like Annika's all over the country, beating the odds, saving money, and building wealth. RISE, Judge John Ninfo, and other activists and educators nationwide are betting on big returns from financial literacy.
Bankruptcy has long been the last legal option for anyone burdened with too much debt. But bankruptcy has always raised questions that go far beyond money. For society, the struggle is finding the right balance between honoring debts and a fresh start.
In 2005, lenders convinced Congress that too many people were going belly up. The lenders were right, but mostly for the wrong reasons. The social stigma traditionally attached to bankruptcy has eroded somewhat in recent decades. But that's not what's really driving the bankruptcy boom of the past quarter century. With heightened global competition, everyone faces increased job insecurity and earnings instability. And the modern credit economy, with its loose lending standards, is hazardous to the ill-informed or the unlucky.
As one bankruptcy authority in Memphis put it, Congress only made the bankruptcy door a little smaller and the process of going through that door a little meaner. But odds are the new bankruptcy law won't succeed at closing that door altogether.
Ryssdal: I'm Kai Ryssdal. The new federal bankruptcy law is only a year old. Many bankruptcy judges, lawyers, and academics agree that the mammoth bill has many flaws. But there is no real appetite on Capitol Hill to revisit the topic, at least not anytime soon.
Bankrupt: Maxed Out in America was produced by Chris Farrell and Sasha Aslanian. It was edited by Catherine Winter of American RadioWorks and Nate Dimeo of Marketplace. Project Manager Misha Quill, Associate Producer Ellen Guettler. Mixing by Craig Thorson. Production assistance from Hale Sargent and Elizabeth Tannen. Web production by Ochen Kaylan. The executive editor is Stephen Smith. The executive producer is Bill Buzenberg. I'm Kai Ryssdal.
To learn more about personal bankruptcy in America, test your financial savvy and share your story, visit our Web site at AmericanRadioWorks.org. Major funding for American RadioWorks comes from the Corporation for Public Broadcasting. Sustainability coverage is supported in part by the Kendeda Sustainability Fund of the Tides Foundation, furthering values that contribute to a healthy planet. This program was produced by Marketplace and American RadioWorks, the documentary unit of American Public Media.
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