Credit unions concerned with turning the bankruptcy battleship around must take the lead to give members the tools they need to avoid chapter 7 declarations. They can't expect Congress to do their work for them.
Means testing, placing limits on borrowing before filing, and uniform homestead exemptions will help, but these provisions address the small percentage of debtors who are purposely gaming the system. They do nothing for the millions who are victims of poor money management.
CUs must communicate the pitfalls of declaring bankruptcy and offer alternatives. They must tell members what they do to help in cases of financial distress, what sponsor programs offer, and what community resources are available. These resources may include consumer credit counseling services, along with agencies that assist with problems beyond financial concerns. That's because families with money problems may also be encountering health problems, abuse, and other dysfunctions.
Lenders often give up on education efforts prematurely, declaring that people in financial trouble lack the discipline to change their habits. Yet they spend millions in attorneys' fees and court costs after the fact, when the debtor finally reaches a financial dead-end.
Credit unions can start with appropriate staff training, so that loan and collections staff recognize early signs of financial stress. Early intervention is key. Credit unions with financial counseling programs have a leg up on the problem by addressing member problems directly. Those that do not have formal programs can also assist their members with products and services designed to build financial assets and reduce the bite taken by high interest rates on household income.
In a recent publication by the Filene Research Institute, bankruptcy expert Michelle White of the University of Michigan estimates that while 1% of American households declare bankruptcy in a given year, as many as 15% of all households would have a financial incentive to do so. For a credit union with 100 members declaring bankruptcy, that means 1,400 more members who would technically be better off financially by declaring bankruptcy. Imagine that charge-off line!
The point is that for most Americans, bankruptcy is not the first avenue of recourse. But in order to avoid the enticements of aggressive attorneys and card issuers, they must be given viable options. Consumers must be made to understand that there are ways out of their financial problems with help from the credit union, their employer, and the community. They also need to be made aware of the consequences of bankruptcy that go beyond the immediate financial relief that it may afford them. That goal can be accomplished through education, not legislation.
Where To Start
We would suggest a message strategy emphasizing that when a consumer declares bankruptcy, we all pay. Over the past decade, annual filings have more than doubled. Consumers need to be made aware that as billions of dollars in debt are left behind,somebody else must pick up the tab. And that "somebody" is all of us with bankruptcy losses passed on in the form of higher loan rates and lower savings rates.
Your message should be taken to three audiences: employees, members, and the community. You should point out that when debt becomes intolerable, we're encouraged to avoid unnecessary guilt about bankruptcy, and advised that creditors expect defaults. Thus, we're free of the stigma once associated with insolvency. You should explain that bankruptcy laws were never intended to give a free pass to those who subvert the law in their favor, and stress the importance of considering all the options available to those who find themselves in trouble,
Who's responsible for this rise? The answer seems to be all of us!
* Attorney TV commercials assure us that bankruptcy is an easy, forgivable way to escape debt. They fail to point out that it was the debtor who made the decisions that resulted in trouble in the first place.
* Retail advertising plays a part in the drama, too. Merchants sometimes resort to strategies such as no-interest, no- payment for three months, six months, a full year. Sounds like a great deal. But the grace period inevitably passes and finds them in no better financial condition than they were at the start. What was a bad situation gets worse.
* Aggressive card issuers give unrealistic lines of credit. As a result, consumer debt now makes up about half of all bank lending, up from a third 10 years ago. Some card issuers even target new bankruptcy filers who, for six years, are prohibited from walking away from their debts again.
* State and local governments legitimized gambling as a revenue source. Trouble is, the very same people who are most at risk are the ones attracted to casinos and lotteries.
Credit unions need to provide practical advice in the form of newsletter articles, statement stuffers, and brochure information to help members take charge of their financial lives.
Dick Radtke and Lucy Harr are partners in Fourth Lake Communications, LLP, and are the authors of numerous books, including CUNA Mutual's technology guide for smaller credit unions. They have also published, "What to say about bankruptcy: A complete communications guide for credit unions," a guide that covers in more detail many of the points above. For info: P.O. Box 45742, Madison, WI 53744 or 1-877-281-1946.