LIFE IN THE SWEATBOX.

• Author: Foohey, Pamela
• Position: Financial "sweatbox" preceding default, Consumer Bankruptcy Project

INTRODUCTION 220 I. CONSUMER BANKRUPTCY IN THE UNITED STATES 226 A. Filing Bankruptcy 226 B. The Financial Sweatbox, BAPCPA, and Bankruptcy Filings 229 II. METHODOLOGY 232 III. PROLONGED STRUGGLES IN THE SWEATBOX 234 A. Longer Stays in the Sweatbox 235 B. Limitations 237 C. Financial and Legal Life in the Sweatbox 239 D. Coping in the Sweatbox 241 E. Going Without in the Sweatbox 242 F. Ending Life in the Sweatbox 244 G. What Makes People Stay in the Sweatbox? 247 IV. DEBT COLLECTION AND INCREASED TIME IN THE SWEATBOX 249 V. CONSEQUENCES OF YEARS LIVING IN THE SWEATBOX 255 A. The Costs of Financial Misery 255 B. Accessing the Fresh Start 258 CONCLUSION 260 INTRODUCTION

The time before a person files bankruptcy is sometimes called the financial "sweatbox." (1) People in the financial sweatbox are on the brink of defaulting on their debts, which is when their lenders can charge high interest rates and fees and otherwise profit from their customers' financial misery. (2) Although the term "sweatbox" often is connected with bankruptcy, how long people spend in the sweatbox before filing and what it means to live in the sweatbox has yet to be carefully examined. Understanding what people endure while in the sweatbox is crucial to evaluating the longstanding belief that people decide to file bankruptcy based on a strategic, financial calculation. This unverified narrative about people's filing decisions underlies our bankruptcy laws and influences how the legal system operates in practice, including whether people actually can obtain the beneficial "fresh start" bankruptcy promises.

Using original data from the Consumer Bankruptcy Project (CBP), (3) we find that people are living longer in the sweatbox before filing bankruptcy than they have in the past, and describe the depletion of wealth and well-being that defines people's time in the sweatbox. Today, two-thirds of people who file bankruptcy report that they seriously struggled with their debts for more than two years prior to bankruptcy. (4) Almost one-third report that they seriously struggled for more than five years, double the frequency from the CBP's survey of people who filed bankruptcy in 2007. (5)

For those people who struggle for more than two years before filing bankruptcy--the "long stragglers"--their time in the sweatbox is particularly damaging, distinguishing them from other debtors. They lose their homes to foreclosure, sell other property, report going without food and other necessities, all while employing multiple tactics to try to make ends meet and dealing with persistent debt collection calls and lawsuits. When long strugglers finally file, they enter bankruptcy with fewer assets than other debtors and overwhelming unsecured debts. (6)

Long strugglers would have benefitted financially from filing months or years before they did. Yet seven out of ten long strugglers say they felt shame upon filing bankruptcy. (7) These debtors' reports about their prebankruptcy lives suggest a model of deciding to file based on something beyond just dollars and cents. This reality contrasts starkly with an enduring narrative about people's use of bankruptcy as a calculated, knowledgeable decision, as evidenced most clearly by debates surrounding the most recent overhaul of bankruptcy laws.

The term "financial sweatbox" came out of the debates leading to the 2005 passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), (8) a major amendment to the Bankruptcy Code designed to decrease consumer bankruptcy filings by making filing more difficult, expensive, and time-consuming. (9) The consumer credit industry insisted that changes to bankruptcy were needed because bankruptcy courts were full of deadbeat, "can-pay" debtors who filed "bankruptcies of convenience" to try to escape their rightful obligations and who felt no shame in "abusing" the system. (10) This story contradicted the overwhelming expert consensus that the bankruptcy system functioned well, abuse was rare, and there was no need for drastic overhaul. (11) Academic articles posited that the consumer credit industry lobbied for BAPCPA to prolong the time consumers spend on the brink of financial default when lenders make the most money--that is, the time people spend in the sweatbox. (12)

Although the financial sweatbox existed long before it was termed as such, BAPCPA brought it to the forefront of discussions about consumer credit policies and bankruptcy. The sweatbox metaphor quickly became popular in commentary both about BAPCPA's effect (13) and about the consequences of the consumer lending business model generally. (14) For instance, the passage of the Credit Card Accountability Responsibility and Disclosure Act of 2009 ("CARD Act"), (15) which limits how credit card companies can charge consumers, highlighted credit card lending's sweatbox. (16) The CARD Act ameliorated some of the effects of this part of the financial sweatbox, (17) saving American consumers $11.9 billion a year without reducing access to credit or increasing interest rates charged by lenders. (18)

Credit cards are but one corner of the sweatbox, and even after the CARD Act's enactment, financial distress undoubtedly remains a devastating experience. What our data show about the hardships that long struggling debtors in particular endure before filing paints a grim picture of life in the sweatbox. The sweatbox's severe financial and emotional drain makes our finding about the increase in how long people struggle to pay their debts prior to filing bankruptcy particularly noteworthy, especially in light of few other measurable changes in the financial and demographic profile of people who file. (19) That people sacrifice increasingly more as they spend a longer time in the sweatbox, depleting assets key to building their postbankruptcy lives, also may make their ability to achieve bankruptcy's "fresh start" and get back on their feet even more tenuous. (20)

The narratives told about when and why people file bankruptcy influence the legislative details of the Bankruptcy Code, how bankruptcy judges rule in individual cases, how attorneys interact with their clients, and consumer financial laws generally. (21) Without data, the polity will construct these narratives around anecdotes that not only might be false, but also may rest on cultural stereotypes. (22) To make evidence-based decisions about bankruptcy and consumer credit laws, we need to understand how people experience these systems. In describing the lengths that people who file bankruptcy go to pay their debts, this Article's results challenge enduring beliefs about people's bankruptcy filing decision-making process, will provide judges with data to make decisions that reflect reality, and should influence debates about changes to consumer credit policies and bankruptcy for years to come. (23)

Part I of this Article overviews consumer bankruptcy, including the debates surrounding BAPCPA's passage that highlight the prevailing narrative about how people decide to file bankruptcy. In Part II, we summarize our methodology. Part III presents our findings about life in the sweatbox, focusing on those people who report struggling with their debts for more than two years before filing.

Why do people report spending longer in the sweatbox before filing bankruptcy? As detailed in Part IV, our data cannot answer that question directly, but the data suggest one primary explanation. As compared with other debtors, long strugglers were much more likely to cite pressure from debt collectors as ultimately leading them to bankruptcy. Half of long strugglers also had a collection lawsuit filed against them prior to bankruptcy. (24) Long strugglers' reports of collection pressures coincide with changes in debt collection and debt buying. (25) In prior decades, falling behind on debts meant being unable to pay businesses and people who were part of a debtor's daily life. Now, collection calls increasingly come from a handful of market-dominant lenders or unknown entities that purchased the delinquent debt from the original creditor or another debt buyer. (26) In addition, changes in information technology should have made it economical to pursue legal remedies for small-dollar debts that a generation ago might have gone uncollected. (27)

In a world of escalating collection tactics, some people who previously may have sweated it out and never filed bankruptcy may now decide to file. For others, changes in debt collection may lead them to conceptualize their money troubles as legal problems addressable by bankruptcy, also bringing them into the bankruptcy system. (28) Combined, which households file bankruptcy may have fundamentally shifted, and with it, debtors' reports of how long they struggle prior to filing.

Regardless of the reasons, people report waiting longer to file bankruptcy. Contrary to assertions that people file "bankruptc[ies] of convenience," (29) our data establish that most debtors resort to bankruptcy as a last-ditch measure and are ashamed of filing. In Part V, we develop the implications of people's lengthy struggles and financial misery for their lives before, during, and after bankruptcy. Understanding the reality of the people who appear in bankruptcy courts is essential to the functioning of the bankruptcy system and to its reform--as well as to the enactment of effective consumer credit laws and policies. We conclude by emphasizing the importance of evidence-based decisions and policies going forward to transform bankruptcy once again into a system that helps people get back on their feet.

1. CONSUMER BANKRUPTCY IN THE UNITED STATES

   1. Filing Bankruptcy

      The debtor initiates almost every consumer bankruptcy case in the United States. The debtor's filing of the petition with the bankruptcy court creates the estate and activates the automatic stay. (30) The automatic stay halts most actions that would adversely affect the...