Kai Ryssdal: From American Public Media, this is Bankrupt: Maxed Out In America, a documentary from American RadioWorks and Marketplace. I'm Kai Ryssdal.

Elizabeth Warren: Bankruptcy is the great hidden event in the lives of millions of Americans.

Maria Burks: I started getting bad credit when I was young, just not knowing, because didn't nobody tell me your credit is like your word.

Marion Chase Pacheko: I felt awful. I felt awful that I would have to go through bankruptcy and I told him that and he said, "Oh come on. Bankruptcy is made for people like you."

Tom Fordham: I would still be living day to day on credit cards with nothing left. So I say, "Thank you, Citibank." Because they chomped on my leg while I still had time to kick them off.

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.

Segment A

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:

Charles Grassley: If people have the ability to repay some of their debt, shouldn't they have to repay some of their debt? It seems to me to be fair to those people who do pay their debt.

Edward Kennedy: This bill before us turns the American dream into the American nightmare. It's not a bill of the people, by the people or for the people. It is a bill of the credit card companies, written by the credit card companies and for the credit card companies.

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:

Lawyer: Memphis is known for the blues, Beale Street, barbeque and bankruptcy!

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.

George Stevenson: Ah, this is a motion to surrender. Is this the house you've been living in?

Woman A: Yes sir.

Stevenson: And you're going to let that go. Tell us why?

Woman A: My husband's on drugs. He abandoned me, so I left the house and now I've been paying garnishment, which is $700 plus rent. Because I had to move The house is vacant. Here are the keys! I can't afford to maintain a house, so I rather give the house back.

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: You've been having trouble making your plan payments.

Woman B: Yes, I was laid off from my job in November.

Stevenson: Do you think if we gave you a little more time that you might be able to…do you understand?

Woman B: Yes, I understand.

Stevenson: There is a point at which we can't give you any more time, but hopefully another four weeks...

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.

Stevenson: Maybe in the mornings you could go out and try to find a better job, before you go to work. That would be the suggestion that I would make.

Man: I'm trying.

Stevenson: Just keep trying. Do the best you can. Okay?

The morning session winds down. Stevenson reflects on the people he sees each day in bankruptcy court.

Stevenson: There is sometimes this perception that everyone who files for bankruptcy is somehow well-off and that they're simply using it as a way to try to avoid paying their bills. My experience has been we are basically dealing with poor people who are just struggling to try and get by from day to day.

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: The vast majority of them are embarrassed, they are intimidated, and they are scared. And they don't want to be here.

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.

Kennedy: There is to some extent a working poor in America, as well. There are a lot of minimum wage jobs.

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.

Kennedy: Folks with at one time in their lives with high income positions have been downsized or outsourced or they've lost their jobs. Instead of making $100,000 a year they may be making minimum wage and maybe even working two different jobs. And still have difficulty paying the utility bills, buying groceries and paying the rent.

When money is tight, setbacks are costly.

Kennedy: I think it's substantially undisputed that approximately 90 percent or perhaps even more than 90 percent of bankruptcy filings are the result of medical problems, job losses, and domestic relations or divorces. That's the vast majority. That was the case 30 years ago and it'll probably be the case thirty years from now.

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.

TV Commercial: Don't worry; I used our new Capital One No Hassel Car ... What's in your wallet?

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: It's been a policy, a public policy in this country to encourage that-to make more credit available to lower- and moderate-income people, to people starting out, to minorities.

Ed Yingling is president of the American Bankers Association

Yingling: You do have more credit available to more people and the end result is you do have somewhat more bankruptcies because of that.

The modern credit economy comes with a price tag. The tab is visible in south Memphis.

Farrell: Some of the stories told in the bankruptcy building started in scarred neighborhoods like this, places that have seen better days. Here, financial predators target people with meager incomes. My guide is Sheila Terrell. She teaches personal finance to low-income Memphians, and she was raised in the community we're driving through.

Sheila Terrell: It looked very different when I grew up. Of course, that was a few years ago. The landscaping is totally different now.

Farrell: How's that?

Terrell: You have a lot of liquor stores here now. There are some cash-in-advance, check-into-cash places.

Farrell: When did the check cashing start to move in? When did you notice that?

Terrell: Probably about ten years ago.

Terrell points out that the businesses she grew up with, like an appliance store, are closed. Instead, high-priced lenders dominate every strip mall.

Terrell: There's another check-into-cash place. Actually, there was a McDonald's where this Shell was or where the Shell is, at one time. Have you ever known a McDonald's to close?

Farrell: No.

Terrell: There was a McDonald's right here on the left. The houses are dilapidated.

Farrell: So it's become a lot poorer?

Terrell: Yes.

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.

Maria Burks: They speak all these finance charges-this rate and that rate-and when it actually comes down to it you're paying for something four or five times more than what you should be paying for it.

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.

Burks: I started having getting bad credit when I was young, just not knowing. Because didn't nobody tell me that it's very crucial that you know, maintain your credit. Because your credit's like your word.

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.

Burks: I'd get them calling and they'd be like, "Is your name Maria Burks?" And I'd be like, "Yeah." And, "Is your social…" and I'm like, "No, that's not me. [laughs] That's not me." But they find you. So, it'll feel good not to have to have those calls in the middle of the night.

Farrell: Were you getting depressed?

Burks: Yes, very depressed. It's very depressing when all you can think about is, you know, trying to keep your head above water.

Finally, Burks decided to file for bankruptcy.

Burks: I hope bankruptcy will give me a fresh start so I can go about owning my own home for me and my children.

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.

Burks: All it takes is someone to actually explain to somebody that-especially being young-the things to stay away from, so that they don't mess their credit up.

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: You've been on the case since 2001. That's a long time.

Woman C: Yes, sir, a long time.

Stevenson: Looks like you've paid in over $24,000 on your case. You've got your car paid. Everyone's been paid. And what we're trying to do is to get the case completed, aren't we today?

Woman C: Yes, sir.

Stevenson: OK, well we're going to show that we're going to be able to go ahead and get it complete and get you a discharge. Congratulations! Good luck to you.

Woman C: Thank you. I'm blessed. I'm glad.

Stevenson: Hope I don't see you down here anymore!

Woman C: I'm going to give you a high five [laughs].

Stevenson and the debtor give each other a high five.

Ryssdal: I'm Kai Ryssdal. You're listening to an American RadioWorks and Marketplace documentary, Bankrupt: Maxed Out In America.

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.

Tom Fordham: I'm just an account to them. I'm just a number and well, they're just a company to me!

Marion Chase Pacheco: I told my sister, too, that I just filed bankruptcy. She said she was sorry [voice cracks]. Well, so am I.

Our program continues in just a moment from American Public Media.

Segment B

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:

Edward Balleisen: The ability of entrepreneurs to gain relief from their debts facilitated entrepreneurship. In many respects the entrepreneurial culture that has been a hallmark of American society for much of its history is very much connected to approaches to bankruptcy.

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:

Todd Zywicki: People just don't feel as badly about filing bankruptcy as they did in the past, and as a result it's become more socially acceptable and more people have file bankruptcy.

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.

Zywicki: We don't want to live in a society with a million and a half bankruptcy filings a year and a substantial amount of bankruptcy fraud and abuse.

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.

Zywicki: When we borrow money we make a promise. And I believe that we should live up to our promises to the extent we can. If we can't for reasons beyond our control then a just, charitable society lets us up and gives us a second chance. But if it's just a matter of convenience, if it's just a matter of trying to live beyond our means, then I take a very different view of that.

Elizabeth Warren: I really wish that we could say that the people who are filing for bankruptcy today are doing it because they just don't care, because it's an easy, cheap way to get rid of debt.

Elizabeth Warren is a law professor at Harvard University. She was a leading voice against the 2005 Act.

Warren: It is deeply humiliating in America to declare yourself a loser in the great financial game.

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 Chase Pacheco: I'm 56. I was married for almost 35 years. I have three children, and they're all grown up. I just had a new grandbaby born two weeks ago.

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.

Pacheco: I went to law school when I was 47.And I passed my bar exam by the time I was 50. It was the first time I took it. So I am a real New York lawyer [laughs].

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:

Pacheco: There was a need for it, I found. There were a lot of people having trouble at their jobs. The thing is, these are people without jobs usually and they don't pay very well.

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.

Pacheco: I can't get a job. I'm 56. Who wants to hire a lawyer who's 56? Nobody. Nobody around here, anyway.

To top it off, Marion was deep in hock for medical bills for her back, credit cards, and student loans.

Pacheco: I was getting an awful lot of calls from people that I wasn't paying. You can't really blame them for calling, but you know, it's hard when you have no money you can't say, "I'm gonna pay you," because I didn't know when I'd be able to pay them. And I kept thinking, "I'll get a job." Finally last October was when I went to see a bankruptcy lawyer. I felt awful, that I would have to go through bankruptcy, and I told him that. And he said, "Oh, come on. Bankruptcy was made for people like you."

Marion was so broke she ended up representing herself in court. During that time, she kept an audio diary for us.

Pacheco: I made it up to Vermont this last week to see folks. They're both 83. And it took me until the last day of being there that I could tell them. I told my mother, and I know she told my dad later. I told my sister, too, that I just filed bankruptcy. Look at me; I'm about ready to cry now. It's so stupid. She said she was sorry [voice cracks]. Well, so am I.

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:

Pacheco: I had to give up my law license, too. I didn't have $350 to pay for it, so I no longer can practice law in New York, or anywhere else for that matter. So my life is changing and it's not great at the moment.

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.

Pacheco: The thing is, you know, I am a perfectly capable person. I am a very good teacher. I was a very good lawyer. There's so many things that I'm good at. And yet, nobody around here really cares. You know, it's really hard finding a job, and I've got to find a job that makes enough money so that I can pay back my student loans. And I can't physically work at Burger King. I just can't be on my feet. I can't work a stand-up job like at Wal-Mart, or something. I just can't do those kind of jobs, and I know that. But the other kind of jobs, I guess I'm just not the right age.

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.

Tom Fordham: The way I look at it, it's one of the last nice places left in the country. Maybe I'm just particular to this particular spot.

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.

Fordham: I liked the individuality, the appreciation of individuality that seems to be up here, the spirit of rebellion.

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.

Fordham: I pretty much went about a year, year and a half without any work at all, maybe ten days worth of working at a hotel and that didn't work out too good.

To make ends meet, he cashed out his pension and relied on credit cards.

Fordham: So a lot of that debt that had built up had been cash advances and then they were transferred between cards to take advantage of the, you know, the special rates. That made it affordable.

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.

Fordham: Then that rate jumped to the default rate.

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.

Fordham: You just pushed me over the edge, and I can't keep up with this. Even if I tried to keep up with this, I couldn't keep up with this. I could run on a treadmill and eventually I'm going to fall off.

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.

Fordham: "You have to call us by," you know, "11 o'clock p.m. tonight." Maybe I do, and maybe I don't.

Tom decided to file for bankruptcy. He says he wasn't ashamed to do it. It was a business decision.

Fordham: I see the policies of these companies are all business, and the way they treat me is all business, I'm just an account to them.

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.

Fordham: I'm just a number, and well, they're just a company to me.

Tom contacted a lawyer.

Fordham: If they hadn't raised me to the default rate, I'd still be paying it. And I'd still be living day to day on credit cards with nothing left at the end of the month, not that I have much left now at the end of the month anyway, but it's more than I would have had.

Farrell: But you would have felt the obligation to keep paying.

Fordham: I would have kept paying it, you know. I would have had the sense of an honorable obligation if I wasn't being abused.

He says the thought of bankruptcy made his wife, Heather, nervous. She was pregnant and wanted to buy a home for their family.

Fordham: She freaked out-"Oh, we can't do that and blah blah."

Heather Fordham: I had grown up thinking that bankruptcy was an awful thing. You know, that if you file bankruptcy, your life was over.

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.

Fordham: I got official notification from my attorney today. "Blah, blah, blah. Here's the notice of discharge," or whatever. I already figured that out. But of course the same day I get that I get a Capitol One auto-finance-the first credit-card related anything I've gotten since filing.

Farrell: Can you open it? Let's see what it says.

Fordham: Wow. Congratulations. I've been pre-approved for up to $25,000 [laughs]. Financing by Capitol One. One of the people included in the bankruptcy.

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.

Farrell: Does it feel like a fresh start?

Fordham: Yeah. Yeah. Actually, it's strange because even without all the credit card bills, I still don't really have much left over. It makes me wonder how I did it for so long.

Maybe the reason money is still tight is the other big change in Tom's life: a baby.

Fordham: Oh sweet pea!

Heather Fordham brings baby Alexandra home from daycare.

Fordham: It's been a long day for the sweet pea.

Heather Fordham: A good day, though.

Heather settles the baby on her lap with a bottle.

Heather: I'm glad it's over with so we can start the next phase of our life and just move on and say "OK, we have a better chance now without lugging around all that extra debt."

Farrell: Did you tell your parents?

Heather: My mother knows. I didn't say anything to my father and his wife only because I didn't want them to worry that, you know, that we weren't making ends meet, when that wasn't the case, actually. So no, just my mom, just as a passing conversation piece, nothing major. Did you ever tell your parents?

Fordham: Not yet.

Heather: I don't know why. You're silly.

Fordham: I planned to tell them when they were coming down last time, but they were kind of here for the baby, and it seemed like a spoiler.

Heather: "Oh by the way, we just had a baby, but I'm filing bankruptcy" [laughs].

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 There you can see photos from this story and tell us if bankruptcy has affected your life. That's at

Coming up - A bankruptcy judge runs out of patience:

John Ninfo: You know, quit the country club you idiot. You can't afford it. And do you really need that new car? For what? My message, my personal message, because I see so many people ruining their lives for no reason, to just participate in this consumerism, is what the Rolling Stones said. Folks, you can't always get what you want.

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.

Segment C

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.

Newscast: In Chicago today, hundreds crowded the corridors and courtrooms at the Dirkson Federal Building ... In downtown Atlanta the wait to file was five hours long ... There's so many people, the line is wrapping around twice … This bankruptcy law firm in Los Angeles says it's been one long marathon as the Monday deadline draws near.

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.

Edward Balleisen: But in the same period there was a rapid increase in reliance on personal finance companies for just arranging small loans for consumption and that growth was very importantly connected to a relaxing of usury laws in a great many states.

The next surge in filings-this time a six-fold gain-came during America's economic Golden Age, the '50s and '60s.

Balleisen: In this case the growth in consumer credit is powerfully tied to the emergence of the change card and then the credit card.

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.

Michelle White: If you think the of problem as being that certain people would look very creditworthy-and by being very creditworthy I mean having high income-get a huge amount of credit, and then file for bankruptcy and not pay their bills, then, well, the new law did a good job for those people. It made it a lot harder to file for bankruptcy.

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:

White: If you think of the problem as being people who are lower down on the income scale, then I think most people will still file under Chapter 7 and things won't be very different than they were before. So it doesn't look like this is really going to increase credit card lenders' profits.

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:

Elizabeth Warren: Congress can pass all the laws it wants, but it won't change the underlying economic realty.

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.

John Ninfo: Too many Americans are just financially illiterate.

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: Many of the people who come through this court who say they've had a catastrophic event, if you really analyze it, they had no savings, lived paycheck to paycheck, had a lot of credit card debt. And when a blip on the radar screen comes along, they can't sustain it.

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.

Ninfo: I know from her schedules that she's divorced and has two teenage girls and isn't at this point getting any child support or alimony. But here is a person who has been working as a teacher for more than 20 years. Has a good salary. But she has $35,000 in credit card debt. Her budget that she has to put together as part of her bankruptcy filing, at least at this point, shows that she doesn't have a penny of disposable income. So how could she have ever paid the $35,000 in debt?

He reaches for another file. This one is from a couple with an income of over $60,000.

Ninfo: One of the spouses has been working at one of our bigger employers in Rochester for 37 years, I believe. And they have $54,000 of credit card debt-almost their annual income in credit card debt. They have no-not one penny of disposal income. To have borrowed $54,000 and being able to repay it over 36 months, they'd need over $2,000 a month in real excess income over their expenses.

Empathy doesn't seem part of Ninfo's vocabulary. He's a former Marine. His office is crowded with American eagles and military mementos.

Ninfo: People say to me, "Well, why are you so tough?" Even my own father said this to me one day after sitting in on court. I said, half jokingly, "Well, I'm a Jesuit-educated, Marine Corps-trained Sicilian, so I guess that's what you get."

Yet during our conversation, Ninfo reveals a different side.

Ninfo: I see far too many people who I look at and it hurts me. Because I think if they knew more about finances and had structured their lives a little differently they wouldn't have needed to be here.

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.

Ninfo: What I tell the young people every day is, "If you do not improve your financial IQ and if you don't learn these things, they will take advantage of you in the consumer credit and service industries every day in as many creative ways as they can. They'll take as much of your money as many times as they can, and no one really cares."

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: This is Greece Athena High School with its wonderful new performing arts center.

Ninfo's wife teaches drama in this Rochester suburb. We drive past her car in the parking lot.

Ninfo: And now we're passing my little Ford Focus with zero percent financing.

The students are rehearsing for the opera Aida.

Performers: [singing] "Like Father, Like Son"

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.

Ninfo: Do all of you think that you learned something from the CARE program?

All: Definitely.

Student A: I had no idea how you establish credit or why you would need credit, or how out-of-hand it could get. So I really took a lot away from it.

Student B: Well, I've started to save more money. After I have a paycheck from work, instead of spending it instantly I take the majority and put it in the bank so I can save for college expenses.

Student C: I mean, everyone always hears, "Oh yeah, credit card debt." But as naive children, we don't know necessarily. Until that presentation. That really opened my eyes to what debt could do to you and how easy it is to get into debt.

Student D: It's kind of scary to see that it could be you. It could be you next year that has to go and see Judge Ninfo in court, saying, "Hi, how are you? Um, I need to file for bankruptcy."

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.

All: None of us ... I know I didn't.

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.

Beth Dixon: People were going to file for things like cell phone debt or Memphis Light Gas and Water bills that they were maybe a month or two behind on. They were pulling the trigger on themselves after, say, two or three months of this and then going to a lawyer who might be very willing to file for them.

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: There's a commonly held thought that poor people just can't save. And in fact, the 200 families that we've worked with thus far have been able to save an average of six percent of their earnings, and this is on very mean wages.

Woman: Lunch has arrived!

Annika Graham: Thank you!

Dixon takes me to meet Annika Graham, a RISE graduate.

Graham: Well, this is my home away from home, Bellevue Junior High School. I've been a secretary here now five years. I'm also a coach of our Distinctive Steppers, which is 27 young ladies, grades seven through nine. I'm also a proud homeowner ever since May 2005!

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:

Graham: It was hard. I got frustrated. You know, I was like, "I can't do this, save this money every month. Not buy any shoes. Not take the kids out on Saturdays because we love the movies."

Dixon: Yeah, but didn't you put a picture of shoes up in your closet?

Graham: Yes! That was just saying I couldn't buy them. I could look at them, but I couldn't buy them at the time because I had a goal. And I wanted to meet that goal. Not for myself, but for my family.

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: It's an adventure for them. It's something they never had a chance to do. So every chance that they get they're on the lake.

Graham says her jump to homeownership has inspired her kids.

Graham: They're ready to open up a savings account. They have shoeboxes under the beds where they're putting dollars and quarters and change and trying to save and that's a good thing ... I forgot to introduce you guys to my co-worker friend, Montanique Freeman, who I'm trying to help become a homeowner also.

But Freeman is a little wary.

Freeman: Sometimes I feel like I'm not that comfortable with purchasing a home, and it seems overwhelming.

Graham: And again when it happens, you're gonna love it, you're gonna love it, you're gonna love it!

Freeman: She's quite the entertainer. I know we had a Christmas party at her home, and it was quite nice and she is the perfect entertainer, and that home comes in handy because we hang out there a lot.

Graham: We do. We like to Karaoke.

Dixon: What would you sing to her if she got her own home?

Freeman: "People all over the world..."

Graham: Yes!

Together: "...join hands. Start a Love Train, Love Train..."

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 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.

Back to Bankrupt: Maxed Out in America

©2018 American Public Media