Several weeks ago, my Money Matters column dealt with the topic of bankruptcy. The article referred to the increase in bankruptcies being filed and provided speculation with regards to reasons for this trend, noting that nationwide the economy is strong, yet bankruptcies continue to increase. The article also dealt with some of the pitfalls of bankruptcy to include the higher cost of borrowing which could translate into bankruptcy petitioners paying higher interest rates, or paying more cash down when they borrow money.
A local attorney and a Daily Press reader took exception to the views expressed. They indicated that I was heartless, judgmental, prejudiced and a banker at heart. I do not typically respond through this venue to address such criticism, but new information has crossed my desk that provides the opportunity to answer the criticism and further enlighten readers in theprocess.
"It's what you learn after you know it all that counts."
John Wooden
Before delving into this information, allow me a moment to state that it is not my place or purpose to judge anyone. I understand that many people have legitimate reasons for filing bankruptcy. In fact, I personally know people who try any other avenue available before taking this final approach.
Bankruptcy is a right provided by the law of the land, the U.S. Constitution. It is not my intention to deny anyone that right. I want people to understand the cause and effect of their actions, but I do not wish to put people down or prompt feelings of guilt and remorse in the process.
VISA USA just released their bankruptcy petition study. This study analyzed the characteristics of Chapter 7 and Chapter 13 bankruptcy petitioners. In addition to analyzing the national trends, the profiles provided by VISA analyzed four states. These states were California, Illinois, Massachusetts and Tennessee.
On a national basis, regardless of the state in which they resided, Chapter 7 petitioners typically shared in common four characteristics.
First of all, Chapter 7 petitioners were likely to have had a decline in income in the year they filed their petition. They typically had allowed debt to increase in direct proportion to increases in their income over the years. This is not surprising since many people receive a raise and immediately ask how much more they can afford for a house or car payment. Sometimes they simply feel they can buy more on credit as the income will cover them. They do not have a plan for how their raise should factor into their budget. Secondly, they were likely to project that their income would be lower than their expenses even after the bankruptcy process is completed. This seems sad for people seeking a fresh start.
Thirdly, they were likely to be employed or self-employed, but not unemployed.
Finally, they were likely to be a bankcard holder. Worse yet, they were likely to be a heavy credit card user, but when credit is thrown at you like candy who is to blame?
Chapter 13 petitioners reflected many of the same characteristics. In addition to the foregoing, Chapter 13 petitioners were likely to have heavy housing expenses. Their house payment was 50 percent of their income on average. They were also likely to have very little unsecured debt.
In a Chapter 13, petitioners agreed to make payments on a scaled down basis. The typical petitioner filed a plan in which their monthly income could not exceed expenses.
The choice of whether to file under Chapter 7 or Chapter 13 is apparently driven, in most cases, by whether the petitioner has any large assets, such as a home to protect. Chapter 13 plans typically allow petitioners to amortize mortgage delinquencies over the life of the plan and are structured to allow current monthly mortgage payments to continue. This was especially true in California and Massachusetts.
Next month we will examine the income levels and categories of debt that constitute the typical debtor profile in the four states analyzed. If you have any Money Matters questions, write to Ronald L. Wilson, Chairman/President/CEO, Desert Community Bank, 14800 La Paz Drive, Victorville, 92392.
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