"CONGRATULATIONS!!! Due to your outstanding credit rating, you have been selected to receive our pre-approved SKR credit card at an all-time low rate of 19.23 APR!"
They arrive unsolicited, like angels of mercy. But what begins as a serendipitous occasion can easily mutate into a nightmare on Elm Street. Some 5 billion credit-card solicitations were mailed to consumers between 1994 and 1995--an average of 32 per each American age 18 to 64. Less sophisticated spenders frequently assume that if a financial institution deems them a good credit risk, then they must be. Little wonder then that the credit card delinquency rate has hit a 20-year high as consumers have sounded the charge to charge.
"People are kind of sucked into it," Knoxville attorney
Beverly Sharpe says. "They should have more sense, but most of us don't. If someone says, 'You can buy this and we'll help you,' most of us will do it."
Sharpe, who estimates that a full 25 percent of her business is derived from handling bankruptcy petitions or financial counseling, says that a "Madison Avenue" mindset combined with easy access to credit can quickly set the stage for financial disaster.
The seduction of easy credit has resulted in a dramatic increase in the number of personal bankruptcy petitions as more than 266,000 individuals filed in the first quarter of 1996. In East Tennessee alone, 3,450 people filed personal bankruptcy in the same time frame. In fact, more bankruptcy petitions per capita are filed in Tennessee than in any other state. Bankruptcy has become an epidemic, and there doesn't seem to be a cure.
Sitting amid a sea of paperwork, US bankruptcy trustee Patricia Foster says she expects more than 14,000 petitions to be filed this year in East Tennessee--compared to last year's total of 11,000.
With Tennessee's bankruptcy rules and regulations among the most restrictive of all 50 states, why does Tennessee lead the nation in personal bankruptcies?
"That's the debate of the day," says Foster. "We all ask that question."
Personally, Foster attributes the increase in bankruptcies to a combination of factors, not the least of which is the proverbial "keeping up with the Joneses."
"People want to give the appearance of success. They want to wear the nicest clothes, have a nice home, nice furniture. They think they have to have a big screen TV because people around them do. You'd be surprised how many of these people (bankruptcy petitioners) have big screen TVs and cellular phones," she says, shaking her head. "What I hate most of all is when they put in their budget that they have to have $200 to $300 for their cigarettes. I just hate that."
A variety of factors weigh in as possible culprits to Tennessee's bankruptcy boom: the lure of easy credit, catastrophic illness or medication not covered by TennCare or other insurance, and advertising that encourages bankruptcy as a solution to financial crisis.
"I think a lot of the advertising has hurt," Foster says. "It makes bankruptcy seem attractive. It looks like an easy solution."
The Nightmare Begins
"I guess what started it was when I got credit cards," Jennifer says ruefully. The 37-year-old office manager confides that credit cards, medical bills, and job loss all played a part in her decision to file bankruptcy earlier this year.
"They were so easy to get and I was making enough money that they were begging me to get the cards. So I got them and swore to myself that I wouldn't abuse them."
Then, a year ago, she was fired from her job. Desperate for work, she accepted a job with no health benefits.
"I took a job and I knew that there was no insurance, but it was a job," she says. When illness struck, she quickly racked up $20,000 in uninsured medical bills that, when added to her mortgage payments and credit card bills, became unmanageable. When she fell behind in her payments, the collection calls began. More than any other factor, the constant harassment made her life a living hell.
"These people are evil," Jennifer says of the collectors. "They will call you at work, which is against the law. But they will call, threaten to come and get you, humiliate you on the job. They'll call you at home at 11 o'clock at night and terrify you. And it leads to a state of panic."
Foster says some of the petitioners she sees have filed specifically to escape collector harassment. "In 15 percent of the cases, the person is totally judgment-proof (they have no assets that can be seized to satisfy creditors), but they can't take any more phone calls."
Bankruptcy specialist Richard Mayer says increasingly aggressive collection efforts, especially for medical bills and student loans, put a huge amount of stress on delinquent payers. "In Tennessee, collectors are working hard to collect. They're quicker to sue in court, which results in garnishment," he says. And garnishment, Mayer says, is cause for dismissal. "You can be fired if you're not protected by Chapter 13."
Sharpe, Mayer, and Foster say that most people delay filing until they're past the point of no return and the stress becomes unbearable. "They keep hoping they won't have to do it," Sharpe says.
Jennifer toyed with the idea of filing bankruptcy for months before she made a move. Sitting at home one evening pondering what to do, she called a number from an advertisement. The ad, she says, was attractive and "made it seem so simple." Still unsure, she made an appointment to discuss the possibilities. Within days, the ball was rolling and she was knee-deep in Chapter 7.
"It's an assembly line," she says of the bankruptcy process. Now, five months after choosing to file, she regrets her decision. Last week, a real estate agent appeared and planted a "For Sale" sign in her yard and demanded a key for a lock box. When she balked, her bankruptcy trustee told her in no uncertain terms that if she could sell her house, she must. That, Jennifer says, was devastating.
The irony is that the primary reason she filed bankruptcy was to protect her home. "I would have endured the torture of the calls and the letters," she says emphatically. "I never would have filed if I thought I'd lose my house."
The Curse of Credit
"If credit were not so available, people wouldn't live beyond their means. They couldn't," Foster says. "They'd go back to eating beans and cornbread and mashed potatoes."
Mike Clark, director of education at the Credit Counseling Service, says credit cards are the ruin of the people he sees daily. The Counseling Service attempts to assist individuals in negotiating payment plans with creditors and is often the last stop before bankruptcy.
"The biggest reason people come in here, the biggest reason people get into debt, is that they've abused their credit cards," Clark says. "People have too many credit cards. If you've got more than two credit cards, you've got too many." Foster sees as many as 20 or 30 credit cards listed on individual bankruptcy petitions. "We have people that owe $75,000 to $100,000 on credit cards. And these people are making $35,000 a year," she says incredulously. "You can't live like that!"
Carey Brown, manager of retail banking for First Tennessee bank of Knoxville, says maintaining a good credit rating in the face of the bombardment of credit card offers requires more restraint than many spenders can muster.
"The proliferation of credit card offers is a real challenge to the consumer because keeping his credit record good when he has more than one or two credit cards can be difficult," Brown says.
Brown denies the notion that sucking consumers into debt is a sinister plot designed to enable banks and other lending institutions to capitalize on human weaknesses.
"I personally don't think the financial industry has an ulterior motive. We all have an interest in keeping customers' credit within reason," he says.
Foster is not as generous. "It's not a conspiracy, but it almost seems that way," she says of lending industry practices. She has little sympathy for credit card companies who take big hits when their deadbeat customers file Chapter 7. "They make big bucks off of interest. I don't think they're hurting." The recent trend of charging people who don't maintain an outstanding balance rankles her as well. "That offends me," she says. "I have no sympathy at all for credit card companies."
Nor is she sympathetic to the cash-advance organizations propelled by greed who prey on those on the bottom rung of the socioeconomic ladder. "Pawn shops and things like that are not considered to be banks," Foster says, "so they can charge 300 percent interest. There are no usury laws that protect the consumer on those issues. But this check-advance thing is just really, really horrible." Recently a man who operates a cash-advance operation called her to complain that a customer had filed bankruptcy and he was unable to collect. "I told him, 'I want you to come tell your story to the judge.'" Foster added sarcastically, "I'm sure he'll be real sympathetic."
The way it works, Foster says, is that an individual takes his or her check for, say, $240 to the cash-advance place, post-dates the check for two weeks, and receives $200. Then, two weeks later when the check is scheduled to clear, they don't have the money in the bank. So they run down the street and use yet another cash-advance place. "Pretty soon they've got a voluminous amount of these things that look like bad checks," Foster says. "We figured it's like (charging) 1,000 percent interest."
"It is an absolute scam," she says. "These people are so unsuspecting and some of them so unsophisticated that they really don't know any better. I wish the legislature would do something about it."
The Downfall of America
"I think credit cards are America's downfall," says Karen, a 37-year-old former factory worker. "I'm totally against them. I will never have another credit card," she vows.
Credit card abuse was a major factor in Karen's decision to file bankruptcy. "My biggest mistake was at Christmas," she confesses. Using her cards for unexpected expenses and gift-giving, her debt grew like waxy buildup on a kitchen floor--slowly over a long period of time. Maxed out on four or five cards to the tune of $10,000, she continued making payments until illness and job loss contributed to her decision to file Chapter 7 this summer. Though covered by medical insurance, her recovery from surgery took three months--twice as long as her doctors estimated--and her employers let her go.
Initially, Karen viewed bankruptcy as a necessary evil. "It bothered me psychologically," she says. "I felt like I was shunning my responsibilities." But today she sees her decision in a more positive light. "A lot of people have one great fall in their life. Bankruptcy is mine. But I've learned from that lesson. I'm starting my life over again."
A fresh start is what most petitioners hope to gain by filing bankruptcy. That's what it should be, Foster says. "It should be for emergencies, for a fresh start." But abusers always exist. "You can work the system if you're smart," she says. Her job as administrator is to ferret out the bad apples. "We make sure that debtors are being honest and keep up with the numbers to be sure they're not embezzling money." When she finds criminal activity, she refers the case to the US Attorney's office for prosecution.
The consequences of "honest" bankruptcies are severe. But for those who see no other way out, the benefits outweigh the risk.
The Price You Pay
The aftermath of bankruptcy--the proverbial free ride in some instances--is no pleasure cruise. Though credit is available under certain circumstances, those who have filed are subject to outrageous interest rates or outright rejection. A car loan, for example, is subject to interest rates of as much as 22 percent, while loans extended to those with good credit pay an average of 8 to 12 percent. Even basic necessities can be denied to those who have filed. But the most grievous side effect of bankruptcy is the damage done to an individuals credit history.
"Chapter 7 is the worst thing you can have on your credit record," Clark says. "It's basically an admission that you didn't pay your bills." A Chapter 7 petition remains on a filer's credit history for 10 years; seven years for the "more honorable" Chapter 13. And nothing short of an act of God can clean up a bad credit rating.
"It looks like an easy solution," Foster says. "But bankruptcy is a horrible place to be once you get there." Mike Clark echoes a similar sentiment: "Life's not over when you go through bankruptcy, but it does stick with you a long, long time."
The Times They Are A-Changin'
One final factor that everyone agrees has contributed to the increase in bankruptcies in recent years is the lessening of the stigma associated with bankruptcy.
"We've become very tolerant in our society of things that didn't use to be tolerated so well," Mike Clark says. "Filing bankruptcy was almost like wearing the scarlet letter. Nowadays it's very common, and it doesn't carry the same emotional weight it used to."
Mayer says bankruptcy has become a financial tool. "The stigma has been lifted," he says. "Today's generation is different from my generation," Foster says. "My uncle filed bankruptcy years ago, and my mother didn't speak to him for two years. She was too embarrassed."
Jay, a 23-year-old graphic artist, says so far, he hasn't seen the downside of bankruptcy. There's been little stigma, and he hasn't had to make any radical changes to his lifestyle. The main difference is that he pays cash for everything he purchases. He still receives credit card applications in the mail.
"The only thing different is that (the applications) are for secured cards," he says. Jay's financial crisis arose after the birth of his daughter when his wife developed agoraphobia and was unable to leave their house for a full three months. Her medical condition and subsequent job loss were manageable until he lost his job a few months later--along with his insurance benefits.
"I originally blamed it (his financial crisis) on those damn credit cards," he says candidly, but it was his wife's medical condition that pushed them over the edge and convinced them to file.
Like Jennifer, he was overwhelmed by the flood of information and the speed at which the process moved. But unlike Jennifer, he has no regrets, despite his inability to afford all of his wife's medication. "It's affected the way we live in a good way," he says philosophically. "Everything we wanted to do before, we do now--it just takes a little longer."
Foster cautions those quick to pass judgment. "Bankruptcy is not an easy solution," she warns, "but it is a solution. Any of us may need it some day, you and me included."