Visa Says Poll Proves Bankruptcy Too Easy, Few Mull Other Options

Seeking to bolster its case for bankruptcy reform, Visa U.S.A. plans to release a study today showing that the law does little to deter consumers from abusing the system.

Citing a survey of 3,500 bankruptcy filers, the card association said two-thirds had little trouble legally wiping away all their debts, and 26% would consider repeating the experience.

Also, 11% of the filers had declared bankruptcy once before, and 8.6% had filed at least twice. One consumer reported filing 12 times.

"This will be another arrow in our quiver," said Kenneth R. Crone, Visa's senior vice president for issuer risk. "It refutes the anecdotal information out there that distorts the true picture."

Visa plans to distribute the study to House and Senate committees considering bankruptcy reform.

It will also go to the Bankruptcy Review Commission that Congress impaneled to propose an overhaul of the bankruptcy code this fall.

Last year consumers filed a record 1.17 million bankruptcy petitions. They contributed to banks' charging off 4.37% of credit card loans last year.

Visa found that only 45% of filers consulted a professional debt counselor before declaring bankruptcy-a finding that outraged Mr. Crone.

"Well over 50% responded that they did not look to any alternatives to bankruptcy first," he said. "Bankruptcy is designed to be a last resort, not a first choice. But these people are not considering other options."

Repaying credit card debt was not a priority, the survey found. Only 16% of filers paid off enough of their bills that issuers allowed them to keep their cards. By contrast, 54% of consumers repaid at least part of their secured debts.

Bankruptcy filings apparently remain a red flag for lenders. Eight out of 10 filers said it was hard to get new credit, and only 11% were able to get credit cards or other unsecured personal loans.

"This blows away the anecdotal myths," Mr. Crone said. "This shows that in reality, new credit is hard to obtain. People are not breaking down doors trying to give new credit."

Among other conclusions:

Money troubles start long before consumers file for bankruptcy. About six out of 10 filers said their financial situation began deteriorating at least 12 months earlier; 19% said 19 to 24 months earlier.

Nearly half of consumers filed to protect themselves from bill collectors. Only 12% cited the loss of a job as the primary reason. Medical expenses, litigation, divorce, and taxes rounded out the list.

Nearly two-thirds relied on a lawyer to decide whether they should void all debts by filing for Chapter 7 or repay some obligations via Chapter 13.

Consumers aged 36 to 50 were most likely to file for bankruptcy, followed by those 26 to 35, and then 50 to 65.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER