It’s Still Too Early, Folks (Very Premature and Incoherent Articles on Effect of Bankruptcy “Reform”)

This is a CNN report that summarizes a longer Washington Post story. The bottom line is that it’s way too early to tell from these reports what’s going to happen. And the detail of the articles runs counter to what is claimed in their headlines:

Report: Bankruptcy filings steady
Tougher law requiring debtors to seek counseling hasn’t stemmed tide of new filings, newspaper says.

NEW YORK (CNNMoney.com) - A toughened bankruptcy law requiring debtors to seek credit counseling is doing to little to curb the number of consumers filing for bankruptcy, according to the Washington Post.

While the new law, which took effect late last year, requires debtors to seek counseling in hopes that it will steer them toward repayment plans instead of bankruptcy court, counseling agencies said most debtors are too far in financial trouble to qualify for a debt-management plan.

Money Management International Inc., the nation’s largest credit counseling organization, told the Post that in the first 13 weeks since the law took effect Oct. 17, only 4.5 percent of the 14,907 debtors the company counseled were in a position to qualify to pay back debts over a few years. Other credit counseling agencies, likewise, said few qualified for any plan other than bankruptcy.

And credit counselors expect bankruptcies to climb steadily in the next few months as consumers are faced with rising energy costs, higher interest rates and the new federally mandated policy that raises the minimum due on credit card bills.

Advocates of the bankruptcy law said it’s still too early to determine how successful the new requirements are in curbing bankruptcies, while financial industry officials said debtors will benefit from the financial education given by credit counselors.

Well OF COURSE the vast majority of filers are Chapter 7s — that was expected.

One big open question is in the long run how many filers are going to be forced into Chapter 13’s partial payments regimen. It will take at least another month or two before we know, because anyone with above-median income in their state, who under the new law would be forced into Chapter 13, would have been wise to attempt a Chapter 7 before the new law kicked in on October 17 of last year.

Also, the stats cited are skewed because, under the old law many people with LOW incomes in the South were put into Chapter 13 who in other parts of the country would have been instant Chapter 7s, based on a bit of a paternalistic tradition in that part of the country. Under the new law, sub-median filers will always be Chapter 7s, whether the paternalistic judges like it or not.

The other big question is whether the rate of filings per year of about 1.5 million (before the pre-October 17 rush) will resume once the fresh cases start coming in. Contrary to the headlines, the longer WaPo article notes that nationwide bankruptcies were running at about 5,000 a week in December — a very low level historically. Well, of course — hundreds of thousands filed ahead of the law’s deadline, and it will be at least another month or two (maybe even three) until the ongoing rate of truly fresh cases will be known.

So, let’s just chill for about 30-60 days, OK?
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UPDATE: Jeff at Credit/Debt Recovery is in the Coalition of the Chillin’ (on the law, not the news coverage), and adds an important point:

The Post article says the law’s supporters “envisioned” that debtors would use repayment plans instead of bankruptcy. I never “envisioned” that. What I expected is precisely what is happening; everyone who needs bankruptcy is still getting it, and they’re getting valuable counseling and education in the process. Where’s the problem in that?

And finally, (and I almost hesitate to get into this here) the article completely misses a huge part of this story. Credit counselors don’t dare try to convert bankruptcy filers into Debt Management Plans; if they do, they know that large groups of bankruptcy lawyers are ready to refer their clients elsewhere, or worse, file lawsuits against them. Why swim in those shark-infested waters? Better provide quality budget counseling and education, and send the client back to his/her attorney for proper legal advice.

Jeff also likes the WORM (Worn-Out Reactionary Media) acronym. Spread the word.