In my experience, most of my clients find it a difficult decision to file for bankruptcy. I find that their concerns and fears are not related to the economics of the situation. That part is usually painfully clear. The fears and anxiety about bankruptcy most of the time arise because of personal guilt, fears about the future, or morality struggles.

As a lawyer, I can provide information and offer my experience to address guilt and fears about the future, but it is very difficult to address someone’s moral dilemma. The fact is, most of us were raised in a culture that preaches that we should all be “responsible” and should “pay your bills.” I, as a Christian, have heard sermons from well-meaning church leaders about how filing bankruptcy is not a “responsible, Christian” thing to do and that a good Christian should struggle to “honor” our obligations, even to the point of adopting a pauper’s existence.

The point of this blog is not to offer an opposing view on these attitudes (believe me, I have one!). But, recently I read an article reporting about studies that were completed by “The Insolvency Service.” The report was titled “Attitudes to Bankruptcy Revisited.” The report looks at the results of surveys carried out in 2006 and 2007 which were carried out to obtain a cross section of views regarding attitudes to bankruptcy. In particular, the surveys wanted to establish whether there was a stigma attached to bankruptcy and if so, why.

The results of the surveys from 2006 and 2007 were compared to the results of surveys taken in 2004. The report found that while opinions of bankrupts and businesses have not changed significantly since the previous surveys, the opinions of individuals have changed. In the latest surveys, only 43% of individuals interviewed thought there was a stigma associated with bankruptcy. This was down from 53% in the previous survey.

It is interesting how attitudes have changed so significantly in just 2-3 years. The full report can be found at http://www.insolvency.gov.uk under “Insolvency Profession & Legislation.” The report didn’t really explore why the attitudes have changed, but it is interesting to me to see how they obviously have changed.

I read an editorial in today’s New York Times that discussed the failure of federal agencies that are supposed to keep up with deceptive and unfair practices in the banking and credit card industries. As a consequence, many hard-working Americans who pay their bills are mired in debt and in danger of losing whatever savings they have. Many might even be at risk of losing their homes!

The editorial urged Congressional action and discussed that in Congressional hearings this spring held by Senator Carl Levin, the abusive policies were highlighted. There was testimony from one witness in which the person had exceeded the card’s $3,000 limit by $200 triggering penalties and interest that amounted to $7,500! After paying an average of $1,000 per year for six years, the witness still owed a balance of $4,400!

While this evidence is anecdotal, the phenomenon has become too common. The editorial cited teaser packages that “bombard” unwary customers. These packages promise low interest rates to start, yet reserve the right for the credit card company to raise rates whenever they want. These provisions are buried in deliberately arcane contracts that run 30 pages long and that “even lawyers have trouble understanding.”

The Congressional investigations and studies by consumer advocates exposed even other deceptive practices such as penalty rates being applied retroactively (higher rates being applied to purchases made before the penalty was incurred or in some cases even on debts that were paid off). One witness pointed out at the hearings that the credit card industry “is the only one allowed to increase the price of a product after it has been sold.”

The editorial also cited the credit card company policy of “universal default” wherein a credit card company can apply high interest and penalty on a credit card for missing payments with a different company! The hearings also discovered the practice of “double cycle billing.” This practice describes credit card policies of charging interest on the full balance in a cycle, even if someone has paid off a large majority of the balance. For example, a cardholder who pays $450 of a $500 balance is still charged interest on the entire amount, not just the $50 remaining.

The editorial goes on to point out that there used to be usury laws in most states that prevented these practices, but those laws have been preempted by federal regulations that are designed to make banks and credit card companies happy.

The editorial went on to support the legislation proposed by Michigan Senator Levin that proposes to limit “penalty” interest rates to an additional 7% above the previous rate and would prohibit proactive penalties and the practice of “double cycle billing.” The proposed legislation would also limit the amount of fees companies could charge customers who exceed their credit limit.

The editorial says this bill is a good “start,” but urges a “comprehensive” approach to the problem. Such an approach should include banning deceptive card offers outright, strengthen federal oversight and toughen truth-in-lending laws toward credit cards.

I read an article today from amNY.com about a hairdresser in New York who went to a debt referral agency called “Debt Choice.” They put her in touch with an attorney that does debt settlement negotiation. The firm was Seidelman Law Firm and the hairdresser ended up filing for bankruptcy in order to get real relief!

The Seidelman firm basically has the person pay them money every month that they deposit into a trust account and when they accumulate enough money, they try to work out a negotiated reduced debt amount in exchange for a lump sum payment. Unfortunately, the hairdresser was confused and thought the program worked like credit counseling where creditors agree not to pursue collections (at least that’s the story) and take smaller payments each month. After months of making payments to the Seidelman firm, the credit card company that had continued to accumulate interest and late charges sued her. She went from a $16,000 balance on a credit card to over $27,000 when they finally sued her.

The hairdresser ended up filing for bankruptcy. Bankruptcy, of course, offered her the only true relief. The point of the article was to expose the truth about “bankruptcy alternatives.” The fact is that credit counseling, debt settlement negotiations, etc… do not save your credit from negative reports. They aren’t “cheaper” than bankruptcy. They can’t force creditors to do things they don’t want to do. Even a representative from the Federal Trade Commission cited in the article, Frank Dorman, points out that debt settlement is “very risky.” In the end, you may or may not get a deal with your creditors and meanwhile your credit is “shot.” Even the Seidelman law firm on its website acknowledges as much.

Be careful, anything other than bankruptcy is riskier and doesn’t offer any guarantee of relief from debt.

Bankruptcy filings were up 11.5% in May over the previous month, according to the American Bankruptcy Institute relying on statistics published by the National Bankruptcy Research Center. May 2007 saw an increase in filing of approximately 51% over May 2006.

“Personal bankruptcies continue to be more volatile this year than in 2006,” said Samuel J. Gerdano, ABI Executive Director. “Overall, consumer bankruptcies are higher than last year, but still well below the levels of 2004-05.”