Learning Financial Literacy in Bankruptcy

Some of this uncertainty was also reflected in the responses to the open-ended question concerning the effect of a reaffirmation agreement. [12] Approximately one-half of the respondents (143) answered this question. [13] Most viewed the effect of reaffirmation simply as a continuation of payments on a debt, often under the terms of the original contract. This suggests that some respondents did not consider the terms of a reaffirmation to be negotiable:

"I will continue to pay the debt" "Continue to pay original payments" "You agree to pay timely payments" "That I will agree to continue paying those bills" "I will have to pay it every month on time" "Paying off balance of bill" "Pay in full" "You want and can afford to pay that debt" "Keeping certain loans" "I make a payment plan"

Given that many consumer debtors enter into reaffirmations on secured debt, it follows that some respondents discussed it in terms of their ability to retain secured property:

"Payments will be made and property will be kept" "Keep the truck" "That debt is valid and must be paid to maintain possession of the security interest" "To keep the product/home" "I want to keep my property"

In general, though, few expressed the concept of a renewal of personal liability or viewed the agreement as a new undertaking.[14] Perhaps many respondents simply felt that this was understood. Those that did focus on this issue generally noted that they were giving up their right to discharge the debt or that they could be sued for nonpayment:

"Debt would be owed again even after bankruptcy" "I will be legally obligated to pay that debt in full" "I will be responsible for paying the debt as if I had not filed bankruptcy" "You can be sued for the debt" "I will be obligated to contract after bankruptcy" "I can’t discharge it" "I owe the debt just like before the filing"

"We will be responsible"

4) Intentions as to specific debts

a) Auto loans

There were three questions relating to respondents’ specific intentions as to secured auto loans. One question asked whether respondents intended to surrender their auto or keep it, and whether they were current on their payments. For those who indicated that they were current on their payments, another question asked whether they intended to enter into a reaffirmation agreement or continue making the payments without a formal reaffirmation. Finally, a third question requested various information concerning different kinds of debt, including auto loans. Most of the respondents (238) answered at least one of these auto related questions.

Several questions permitted respondents to indicate if they did not have an auto loan. [15] These responses suggested that more than one-fourth of those responding to the auto questions (27.7%) had filed their bankruptcy cases without having an auto loan. This group either has autos that they own free and clear or do not own vehicles at all. [16]

We were initially surprised by the significant number of respondents who stated that they intended to surrender their auto to the secured creditor. Among the responses to the direct question on this issue (Question No. 9), 35.1% answered that they planned to surrender their auto. However, several who stated they would surrender later indicated in response to other questions (Questions Nos. 9 and 10) that they planned to continue making payments on the auto loan or would reaffirm the debt.[17] If these responses are considered, the number who plan to surrender drops to 28.1%. This lower number likely presents a more accurate account of those who were not going to retain their autos.[18]

Table 4: Intend to surrender auto

For those current with payments on their auto loans, another question (Question No. 10) sought to determine how many would enter into a formal reaffirmation or elect to retain the collateral and simply continue to make payments. Since debtors who are current may utilize the "retain and pay" option, [19] they were more likely to select this option; 74.8% stated they would continue payments without entering into a new contract and 25.2% said they would sign a reaffirmation. However, given that many of the secured creditors had probably not yet exerted pressure to reaffirm by the time the surveys were completed, we suspect that more respondents actually signed reaffirmations before their bankruptcy cases were completed.

In addition, a number who said they would simply continue payments later responded to another question (Question No. 12) by stating they would enter into a reaffirmation agreement on their auto loans. Nevertheless, when the responses to all auto related questions were considered, including those by respondents not current on their payments, a greater number of respondents (37.9%) stated they would reaffirm their auto loan than those (23.0%) who intended to retain with continuing payments. When just those who planned to keep their autos were considered, 57.7% stated they would reaffirm their auto debt.

Table 5: Intend to reaffirm auto loan

b) Home mortgages

Respondents were also asked about their plans concerning home mortgage debt. Among those who responded to this question (169), more that one-half (56.8%) do not have any mortgage debt. For the remaining 43.2% who have a home mortgage, nearly two-thirds (63.0%) intended to enter into a reaffirmation agreement on the debt. [20]

Table 6: Mortgage debt

c) Credit cards

Respondents generally did not distinguish between credit cards issued by department stores and those of major credit card companies. Approximately three-fourths (72.5%) of those who responded to this question listed at least one major credit card in their bankruptcy schedules, and 62.9% listed at least one department store credit card. Slightly more respondents with department store cards (8.2%) indicated they intended to reaffirm than those with cards from a major card company (5.8%).[21] In both cases, though, the number of respondents expecting to reaffirm credit card debt was significantly less than for auto or home-secured loans. [22]

Table 7: Credit card debt

 

d) Other debts

Among the 41.8% of respondents who stated that they have a loan from a finance company, 22.1% said they would reaffirm the debt. We were not surprised that more respondents were anticipating a reaffirmation on loans from finance companies than on credit cards. In many cases, these loans are secured by a non-purchase money security interest in household goods. [23]

As for child support obligations, most (91.3%) of the respondents indicated that they did not owe child support. The respondents who claimed to owe support predictably indicated that the debt would not be discharged by their bankruptcy.

Almost two-thirds (59.9%) of those who responded to the question about utility debt said they did not have utility debt. A significant number (23.4%) of those having utility debt believe that the debt will not be discharged. These responses confirm our suspicion that many debtors erroneously conclude that utility debt is not dischargeable, which in turn may account for the low number of debtors who actually list such debt on their bankruptcy schedules.

Finally, respondents were asked to list any other debts they believed would not be discharged in their bankruptcy and/or that they intended to reaffirm. The most common debts listed as not subject to discharge were student loans (19) and taxes (10). Other debts that respondents felt would not be discharged were those relating to: medical services (3), utilities (3), rent (2), car insurance (1), boat loan (1), Kirby vacuum cleaner loan (1), pension loan (2), and a debt to a friend (1). As for debts to be reaffirmed, several respondents (6) stated they would reaffirm loans secured by home furniture, which we assumed were likely to be purchase money secured loans. Several mentioned simply a "bank" loan (4) or "personal" loan (2).

Future Credit

The next section of the survey explored the respondents’ attitudes about their future credit needs and expectations concerning the impact of bankruptcy on their ability to obtain credit. In a related matter, an initial question tested the respondents understanding of the credit reporting restrictions applicable to bankruptcy. Only one-half (52.8%) of the respondents were aware of the longer 10-year period for reporting of bankruptcy information. Approximately one-fourth thought that it could be reported for the normal 7-year period (17.6%) or a period from 7 to 10 years (8.6%). The remaining respondents either did not know (12.9%) or gave other incorrect responses (8.1%).[24]

Table 8: Understanding of credit reporting restrictions

Respondents were cautiously optimistic about their future credit prospects. Approximately one-half (58.5%) believe that they will be able to get credit in the future, while 10.4% felt they will not get credit and 31.1% said they did not know. Nevertheless, respondents did not have plans to rush out after bankruptcy and apply for new credit. Almost two-thirds (64.7%) of the respondents said they will wait more than 2 years before applying for new credit. Among the remaining respondents, 14.7% will wait between 1 to 2 years and 10.3% will apply for credit within a year. Only 7.1% said they will apply for credit immediately after getting their discharge. [25]

Table 9: Expectations about future credit

Given the large number of consumer debtors who file bankruptcy because of their inability to repay credit card debt, [26] it follows that many of the respondents hope to avoid or limit credit card use after bankruptcy. The majority of the respondents want to avoid credit cards (45.8%) or believe that they can get by without them (33.3%). Only 11.7% feel that it is very important to have at least one credit card. Consistent with this sentiment, most of the respondents (80.2%) said they will not apply for new credit cards when their bankruptcy case is closed. Others stated they would apply for new credit cards (12.7%) or would use their current card(s) after reaffirming the debt (5.1%).

Table 10: Expectations as to future credit card use

Respondents were also asked to indicate the types of new credit they planned to get after bankruptcy. As expected, home mortgage and auto loans ranked the highest.

Table 11: Types of credit sought after bankruptcy

Respondents were asked to predict what they might expect to pay in interest rates on certain loans. Many chose not to answer this question; 46 responded as to credit cards and 67 responded as to auto loans.

Not surprisingly, few respondents thought they would be able to obtain credit cards at low interest rates, and most anticipated paying interest rates higher than 18%. Approximately one-third (32.6%) believed they will pay interest at 22% or higher. Given the prevailing market rates on credit cards, it is understandable that many debtors emerging from bankruptcy would not expect to obtain credit card debt on the best terms.

Table 12: Expectations as to future credit terms (credit cards)

We were more troubled, however, by the significant number of respondents who expected to pay dearly for an auto loan. Though interest rates for conventional auto loans during the time when the survey was conducted were generally less than 9 %, the majority of respondents (85.1%) believed that they would not be able to get a car loan for less than 10 %. Significantly, almost one-half (46.2%) anticipated paying quite a premium for such loans, with this group expecting to pay 18 % or higher for an auto loan.

Table 13: Expectations as to future credit terms (auto loans)

F. Other Matters

One final question asked respondents whether they are able to use the Internet.[27] Almost two-thirds (65.5%) of those who responded indicated that they have some form of access to the Internet, with 50.0% stating that they use the Internet in their home. 34.5% do not use the Internet.

Table 14: Use of Internet

Finally, respondents were given the opportunity to provide additional comments. The following are some of the responses:

"We filed bankruptcy to save our home from investors who were basically trying to steal it, telling me that they were my only hope." "My lawyer was very informative and helpful" "The only reason I am filing bankruptcy is because of medical bills." "I am frustrated that I had to file this Ch 7. My ex-husband filed a bankruptcy and he made false statements on petition. I pointed all this out to trustee but no one cared. It should have been denied the minute they found out he lied." "Hoped that IRS and state would negotiate on large balances owed." "I was not happy with the attorney’s explanation and advise, and very disappointed that no other attorney would even speak to me." "It has been a hard lesson learned." "I wish there was a way to get rid of bills other than bankruptcy." "Right now my priority is to live stress free." "Got into a jam and borrowed money to repay loans. It will never happen again." "I have a good lawyer!" "Had to file due to disability." "Living on a cash basis seems more simple and elegant to me presently"

[27] This question was added at the suggestion of the Executive Office of the United States Trustees. Unfortunately, the request to add this question did not come until after many of the surveys had been distributed to panel trustees. This accounts for the rather low response.