If you polled most bankers today, they would likely tell you that lack of social stigma is one of the key reasons bankruptcy is viewed as an acceptable solution by consumers faced with overwhelming debt.
But what is it that drives consumers to choose bankruptcy over other options as a solution to debt problems?
Visa recently convened a one-day forum to analyze this issue, calling upon a variety of bankruptcy experts: judges, Chapter 13 bankruptcy trustees, credit counselors, professors, bankruptcy lawyers representing creditors, and Visa member financial institutions.
These participants used the following mission statement: To provide honest debtors with awareness of options and alternatives so that bankruptcy protection is truly the last resort, to pursue dishonest debtors abusing the system, and to promote fair and just legislation.
What resulted was a highly animated discussion with wide-ranging opinions but consensus on several points.
First and foremost was the fact that consumers clearly lack awareness of alternatives to bankruptcy.
The Austin, Tex., office of Consumer Credit Counseling Services recently surveyed consumers after they had filed for bankruptcy. These people said that, had they known a credit counseling alternative existed to help them devise a debt management program, they wouldn't have filed for bankruptcy.
Helping to promote the "ease of bankruptcy" belief are bankruptcy attorneys who aggressively market to consumers, frequently advertising on television and in newspapers. These lawyers' message to consumers regarding bankruptcy? A promise of hope and a cheap and easy way to get out from under. In other words: It's not only acceptable; it's smart to go bankrupt.
Contributing to that message is the fact that many well-known people, some of whom are in highly visible leadership posts and are looked upon to set a positive example, have filed for bankruptcy. Corporations that file for bankruptcy make headlines as well, all of which makes bankruptcy seem all right and, in fact, the norm.
Other perceived stimuli to bankruptcy filings, the group concluded, include lack of financial management knowledge, divorce, and loss of dual income.
Another key point of agreement among the forum participants: Our legal system offers more incentives to file Chapter 7 bankruptcies (straight liquidation) than Chapter 13 bankruptcies, in which consumers are required to pay back part or many of their debts.
Participants clearly believed that the system should be changed to encourage more bankrupt consumers to opt for Chapter 13.
While Chapter 7 is a relatively easy bankruptcy alternative - filing, having a lawyer handle a one-time legal case - Chapter 13 is a much longer exercise. It requires a three- to five-year debt repayment plan and substantially more legal counsel.
In fact, forum participants said they believed bankruptcy lawyers themselves should be a target of bankruptcy education, since many don't know how to manage Chapter 13 bankruptcies for their clients.
Further, credit bureaus don't do a good enough job of distinguishing between Chapter 7 and Chapter 13. On many credit bureau reports, all bankruptcies look the same, and consumers aren't given credit for the pains they've taken to complete a Chapter 13 filing.
That is unfortunate considering that, according to Tim Trueman, a Dallas-Fort Worth trustee in Chapter 13 filings, consumers who go through the rigorous exercise of a Chapter 13 bankruptcy are rewarded with renewed self-esteem and a moral commitment never to file bankruptcy again.
Has the stigma of bankruptcy truly gone away? No, said many forum participants, but it has been considerably reduced.
Durant Abernethy, president of the National Foundation for Consumer Credit, said he believes many of his organization's clients have a moral commitment to repay their debts and for that reason seek help in doing so. Purdue University's Mike Staten agreed, noting that debt management and Chapter 13 need to be emphasized.
And according to forum participants, a key driver in consumers' desire to repay is their fear of losing credit for the rest of their lives and living with a blemished credit record that will haunt them in ways extending beyond obtaining credit, such as getting a new job.
Other recommendations of the forum? Change the bankruptcy code to require money management education. Chapter 13 trustees have a unique opportunity to educate consumers at this stage with good potential for excellent results.
Moreover, said many forum participants, the credit industry should look for other highly "teachable" moments - such as when credit is refused and consumers are most concerned about how to get approval.
As a result of this exchange of information, Visa, on behalf of its member financial institutions and in cooperation with MasterCard, plans to launch legislative and consumer education initiatives.
These initiatives include a consumer awareness campaign that will present a message countering the position of bankruptcy lawyers and others who promote bankruptcy as a smart, inexpensive, easy, and socially acceptable alternative.
Print and radio advertising in several markets in the United States will raise awareness of consumers looking for bankruptcy alternatives. Public service announcements and publicity targeted at consumers will reinforce this message.
On the legislative front, Visa and MasterCard will be looking at Fair Credit Reporting Act legislation that would require credit bureaus to make note of the difference between Chapter 7 and Chapter 13 bankruptcies as one means of providing an incentive to opt for Chapter 13 bankruptcy. Other legislative remedies will also be considered.
And the industry will focus on promoting credit counseling and payment plans over Chapter 13 filings through creditor participation, consumer education, and incentives such as the temporary suspension of collection efforts and waiving interest, late charges, and penalties. Visa will also work with Chapter 13 trustees to educate consumers.
The proactive response of the forum exceeded all expectations, generating a meaningful discussion on this high priority issue. We believe the forum is likely to continue helping shape bankruptcy-related initiatives.
Mr. Crone is vice president for issuer risk at Visa, which is based in San Mateo, Calif.