Four years ago Tianna Kennedy was debt free. Today she’s $80,000 in the hole and declaring bankruptcy. Kennedy’s financial woes aren’t due to profligate spending. She had a run of bad luck in a country with a shrinking safety net. It could happen to anyone. But if the Bankruptcy Abuse Prevention and Consumer Protection Act passes Congress, getting back on her feet might become a lot more difficult.After college, Kennedy worked in real estate. She returned to school to pursue a master’s degree in Performance Studies, financing her way with large student loans. Three weeks into school, she learned that her recurring illness was malaria, picked up on a trip to Guatemala. This is where things start to go downhill.
“I was in school, going crazy from the malaria pills. I lost my job because I was so sick and stressed,” Kennedy says. “My student loan money went entirely to rent.” Then she started experiencing fatigue, joint pains and dizzy spells. “As it turns out,” she explains, “I had been bitten by a tick and got Lyme disease.” Kennedy extended her stay in grad school to keep her health insurance, but never graduated. With no degree, she still has to pay back her student loans.
Where did she go wrong? She worked, went to school, went on vacation. She didn’t buy a Mercedes, she wasn’t wearing furs. She was hit by a series of unfortunate events. And then she got kicked when she was down.
“I fell behind on my credit card bills, and they were maxed out from medical treatments. And because I fell behind, the interest rates all shot up to 24 percent,” Kennedy sighs. “You wind up just paying off interest, and never chipping away at what you owe. At this point I just really don’t see any way out besides bankruptcy.”
That way out might soon be closing. Under current law, most people file for Chapter 7 bankruptcy, in which almost all debts are liquidated. The new bankruptcy law would push more borrowers into Chapter 13, which provides only partial relief from creditors. The Senate version of the law (S. 256) passed in mid-March, and the companion House bill (H.R. 685) is expected to pass imminently. President Bush has said he will sign it.
While bill sponsor Senator Chuck Grassley (R–Iowa) claims that the recent growth of bankruptcies is due to “irresponsible consumerism,” Tamara Draut of the economic policy group Demos disagrees. She attributes the growth in bankruptcies – over 1.5 million personal bankruptcies in 2004 – to a weak job market, rising tuitions and healthcare expenses. Almost half of all personal bankruptcies are precipitated by medical emergencies. Draut also points to abusive practices in the credit card industry as a major contributor to bankruptcy.
Once Kennedy declares bankruptcy her credit will be shot for 10 years, until the bankruptcy filing comes off her credit report. “I’m really sad about what bankruptcy means for my future,” Kennedy says. “It’s as if one’s social worth is based on credit reports more than on who you are or what you do now.” A damaged credit report affects far more than a person’s ability to get credit; a bankruptcy can make it hard to get a job, an apartment and even insurance. “Before all this happened, I had platinum cards – I could’ve bought a house on credit,” recalls Kennedy. “Now, I’m locked out. I really wish I didn’t have to declare bankruptcy. But I’m glad it’s an option.” Kennedy has that option now. But for the person who finds herself out of work and $80,000 under a year from now, 10 years will simply find her a decade older and deeper in debt.