Many people who file for Chapter 7 bankruptcy don't understand their legal rights, which can make them vulnerable to abuses by creditors both during and after their filing, according to a survey recently released by a consumer group.
The National Consumer Law Center, which surveyed 261 people who filed for liquidation bankruptcy, found few understood the process of "reaffirmation," which allows creditors to collect on debts that would have otherwise been erased in bankruptcy.
That means many people could find themselves still mired in debt after a bankruptcy--a trend that could grow more pronounced if Congress approves bankruptcy reform legislation that significantly strengthens creditors' right to reaffirm debts, consumer advocates say.
"These consumer debtors remain vulnerable to creditor overreaching after bankruptcy because they do not have the financial skills necessary to evaluate the costs and benefits of reaffirmation," the recently released report said.
Chapter 7 bankruptcy is used by consumers to erase most of what they owe, providing a "fresh start" free from debts or collection attempts by creditors.
People can choose to retain some debts under current law when they want to keep property they've borrowed money to buy. Many people reaffirm auto loans to keep their cars, for example, or mortgages to avoid foreclosure.
Some creditors, however, pressure bankruptcy filers to reaffirm unsecured debts, such as credit card balances that would otherwise be wiped out in a bankruptcy filing. Bankruptcy courts typically frown on such reaffirmations because they can interfere with court-approved repayment plans or lead to subsequent bankruptcies when consumers again find they're struggling to keep up.
Some aggressive creditors have even faced prosecution and fines. Sears, Roebuck & Co. was convicted of fraud in 1999 and fined $60 million for its high-pressure debt-reaffirmation techniques.
Creditors would be given greater latitude to seek debt reaffirmation, however, if bankruptcy reform legislation is finalized by Congress. Both the House and Senate passed bankruptcy reform bills in March that would give credit card issuers and other consumer lenders more power to strike such side deals with consumers who file for bankruptcy.
The bills have yet to be considered by a conference committee that would reconcile differences between the two versions. The legislation's chances of passage are unclear now that the Republicans have lost control of the Senate, although President Bush has indicated he would sign the bill if Congress can agree on a final version.
Even if bankruptcy reform isn't enacted, consumers need more education so that they will understand their legal rights and get the full benefit of a bankruptcy filing, the consumer law center said.
The group's survey found that 69% of the Chapter 7 filers did not know that they had a right to cancel a debt reaffirmation. Typically, consumers have 60 days to change their minds after reaffirming a debt.
About half said they planned to reaffirm a debt during their bankruptcy, typically an auto loan or a mortgage, although 6% intended to reaffirm a credit card debt and 8% a department store debt.
Nearly 29% did not know that debt reaffirmations were entirely voluntary, and 6% believed a creditor could force them to accept a reaffirmation, the survey found.
Most of those surveyed viewed a debt reaffirmation as a continuation of their previous obligation, rather than as a new contract that can be renegotiated, the consumer group said.
Personal bankruptcy filings reached an all-time high in the first three months of the year, rising 17.8% from a year earlier, to 356,836. Nearly three-quarters of the personal filings were for Chapter 7 liquidation, with most of the rest filing for Chapter 13, which requires repaying some debts.