ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Monday, April 21, 1997 TAG: 9704210105
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF THE ROANOKE TIMES
MEMO: ***CORRECTION***
Published correction ran on April 22, 1997.
Every person who files a petition for bankruptcy must pay a filing
fee of $175 to the Bankruptcy Court. A story on Monday's Money page
erroneously said that it was possible to file as a pauper without a fee.
John W.L. Craig, clerk of the court, said that idea was tested in a few
jurisdictions but will be allowed to lapse, so the fee must be paid.
The typical American household pays about $300 a year in higher prices to absorb what businesses lose from customers who wipe away bills through bankruptcies.
PEOPLE WHO wipe away their debts through bankruptcy cost the typical American household about $300 a year in higher prices.
That means that consumers pay the cost when people file to discharge their debts, contends the Bankruptcy Issues Council, a group composed primarily of credit-card and financial institutions. In addition, it says, taxpayers spend more than $200 million a year just to process bankruptcy petitions filed in federal courts around the country.
Last year, a record 1.1 million people filed for personal bankruptcy nationwide, erasing an estimated $30 billion in debts. Filings also reached a record 9,657 cases last year in the federal bankruptcy court's Western Virginia district, based in Roanoke. The local court's 1996 total was up 35 percent over 1995, continuing a trend that began in 1993.
The council says filings are expected to rise 23 percent this year. Ninety-five percent of the petitions are from individuals rather than businesses.
The bankruptcy process is open to anyone who thinks he or she has too many debts to pay. The council would retain bankruptcy for people who really need the option, but it contends that today's system is not based on true financial need.
That is not exactly the experience of A. Carter Magee Jr., whose Roanoke law firm, Magee, Foster, Goldstein & Sayers, represents both filers and creditors in bankruptcy court.
Debtors who come to him to file bankruptcy petitions are "distraught and upset," some crying, Magee says. They are filing because they feel they can't pay their bills, he says. "At least they say their goal is not to stiff creditors."
People who file for bankruptcy range from professionals to welfare recipients, Magee says, and usually are middle class.
Most, to him, fit the original concept of the "helpless, hapless, unfortunate debtor" the law was designed to help. The idea is to give such people a fresh start.
People live close to the financial edge, Magee says. Then they face catastrophic illness, loss of a job or a death in the family, sending them over that edge.
The fourth driving force in bankruptcy is divorce, which almost always leads to financial trouble, according to Magee. Financial problems may cause the divorce in the first place. "Divorce and bankruptcy go hand in glove," he says.
Credit-card balances and medical bills account for most of the debts that Magee says his clients want dismissed in bankruptcy.
Some people can't handle credit cards, Magee says, and wind up in trouble through their own poor judgment. Banks and other credit-card companies worsen the problem by extending too much credit.
But most people, he says, get into trouble first because of an illness or job loss. Then they begin to live on the only source of money they have - their credit cards.
Also, Magee says, many workers today lack health insurance at work. A woman without insurance, he said, may not seek medical support during a pregnancy. The result often is a difficult pregnancy and a sickly baby, compounding the financial problems.
Some people blame outside forces for suggesting that individuals should seek bankruptcy protection.
The federal government, they say, sets a bad example by spending beyond its means. And corporations facing a huge problem, such as the prospect of long-running lawsuits and class actions, seek reorganization and protection in a bankruptcy court. Or lawyers encourage bankruptcy through advertising.
Magee has never had a client mention those factors. Most, he says, are so involved in their own financial problems that they don't even follow news about the federal budget or corporate reorganizations.
Magee says the bankruptcy system "works pretty well" for most debtors. Indeed, a recent survey of filers by Visa U.S.A. showed that two-thirds found the process to be an easy one. So easy, in fact, that a quarter of them would consider filing again.
The cost could be a problem. Magee says that the filing fee for petitions is $175, which many people consider too high for someone already in financial trouble. You can, however, file as a pauper and avoid the fee.
He estimated lawyers' fees for the process at $350 to $750, depending on the size of the case and the amount of debt. Lawyers with lower prices may charge extra for some of their services, such as preparing a homestead deed.
There is a penalty to pay after debts have been discharged, however. In the Visa survey, 80 percent said they could not get a credit card.
About two-thirds of the filers taking part in that study relied on their lawyers to choose between the two types of bankruptcy open to individuals.
One, called Chapter 7, involves liquidation of all debts. The alternative is Chapter 13, a wage-earner plan for repayment of debts. The latter provides for paying off all or part of debts under court supervision while interest on the debts is stopped.
The number of filings "is not alarming to me," Magee said. Still, he wonders why so many people are being forced into that option while the economy is healthy, inflation is under control and the markets are growing.
One solution, he said, might be mandatory classes in high schools teaching personal finance - so people don't live so close to the edge financially.
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