Ask Leslie Linfield about today’s consumer and you might not like what she has to say. However, her doom-and-gloom take isn’t based on some government report. Rather, it stems from her work as executive director of the Institute for Financial Literacy, a Portland, Maine-based non-profit organization whose role in credit counseling was expanded when the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was enacted.

Linfield’s organization, however, saw the change as an opportunity to establish a research program aimed at better understanding why people file for bankruptcy. In May, the institute released results from its second such study, which surveyed 24,038 clients. Linfield sits down with the magazine this month to review the Institute’s findings.

Q: Can you give our readers a little background on your organization?

A: We formed in 2002 as an adult financial literacy organization. Our mission is to make effective financial literacy education available to adults. We publish the National Standard for Adult Financial Literacy Education, we host an annual conference on financial education, and we maintain the Library of Personal Finance. It’s the only library of its kind in the country.

Q: I bet you’ve been pretty busy since the changes to the bankruptcy rules were enacted.

A: The changes did cause us to grow. In fact, we’re growing pretty quickly. Now, there are really two components to the Institute. We do the required one-on-one credit counseling to find out why the individual is financially distressed. We also offer the financial education required under the new bankruptcy rules, which also includes a survey course in personal finance with debtors who are in bankruptcy.

The bankruptcy law in 2005 was the first law to mandate adult financial education, and it’s really one of those shining spots. I think we’ll look back 20 years from now and recognize that was a smart thing to do.

Q: We have a columnist whose tag line this year has been: ‘We’ve gone from a credit-driven economy to a credit-dependent economy.’ How true is that?

A: I think it is true when you consider that two-thirds of our gross domestic product is currently consumer spending. That wasn’t the case 30 years ago. So, when you look at that piece of data and then you look at income numbers and wage numbers, as well as consumer credit over the last two decades, you can really start connecting the dots. We’ve gone from manufacturing to service.

You can also look at the wages people are receiving today. Wages are lower, yet we’re still consuming. Unfortunately, consumption is being fed by credit. And the actual outstanding balances and the Fed reports for consumer credit have consistently gone up and up.

Q: The big talk earlier this year was about how the subprime mortgage market would affect the automotive finance industry. Most experts didn’t see a link between the two, but some noted the repercussions in regards to consumer spending. What’s your take?

A: Well, to give you some numbers, we will see 1.6 million foreclosures this year, and we will see an excess of 800,000 bankruptcies this year. That’s a problem. And in 2008, that bankruptcy number will most likely breach the one-million mark. As for foreclosures, it wouldn’t surprise me if we see it hit 1.6 million again, if not greater.

And again, what’s driving this is all that junk paper that was being written. People who couldn’t afford to be buying were buying. When you talk about finance numbers, we used to underwrite loans where 28/36 was the ratio. The industry has abandoned that model. Now, they’ll put you in any kind of paper if you simply have a pulse. Unfortunately, this situation has laid the groundwork for what we’re seeing now. What’s frustrating is everybody kind of shrugs and says, ‘Well, it’s not really my problem. I don’t touch the paper.’ However, it really is your problem because you can’t get repeat business if the customer goes belly up.

Q: So what do you see happening in 2008? Will things get better?

A: I think 2008 is not going to be a pretty year. I don’t think the real estate market is really going to improve much. I don’t think delinquencies are going to improve much either. I think things might actually get a little worse. Clearly, the real-estate market and interest rates on mortgages will drive that bus. What’s interesting is you hear a lot about subprime prices, but what you’re not hearing about is that ‘A’ and ‘B’ paper is becoming just as problematic. It hasn’t hit yet, but those rates are about ready to start adjusting, too.


When the media writes about delinquencies, they typically profile some poor family who can’t make their payments. That’s because Joe and Judy Smith from the suburbs don’t want to talk to a reporter about their problems. But when you start looking at that segment, there’s something happening there. It’s kind of fascinating to see that starting to hit. It’s not just the poor.

Q: So, how did the change in bankruptcy rules affect lender?

A: Everybody thought the new bankruptcy law would get rid of cram-down under Chapter 13. However, we’re seeing courts coming back and saying, ‘Well, if you’ve got debt from the last car rolled into the new car note, that note is not a purchase money note.’ They’re basically separating out the debt, saying it’s not pending.

Q: I hear what you’re saying, but the job of a dealer is to move vehicles and sell products?

A: It is their problem, because a weaker economy means a weaker consumer. And that affects the trade cycle. Today, responsible selling and lending ensures a return visit. If you put them into too much car and too much paper, all you’re guaranteeing is they’re going to the buy-here, pay-here lot down the road. If you own that buy-here, pay-here lot, then you’ve got yourself a great business model. If you don’t, I think it’s wise to actually take a deep breath, really look at the customer, and recommend something that’s more reasonable. That’s the lesson the real-estate industry needs to learn, because what we’re seeing now is nothing but a repeat of the sins of 1989.

Q: One of the problems is how competitive it is out there. Dealers know if they can’t get a deal done, someone else will. What’s your take?

A: I think that’s the struggle with dealers. Basically, it’s a game of musical chairs. The question then becomes, who’s holding the paper when the music stops? We don’t know when the music is going to stop, but we all know the music’s probably going to stop at some point. We’re also not sure what’s going to happen when that point does come. The last time we had an economic slowdown we didn’t have this kind of securitization out there. This is really a newer phenomenon, and I think that’s what’s a bit frightening. We just don’t know what the repercussions will be with so much of this paper, I believe, being held offshore. It now becomes an economic political question. But do you think the guy in the lot trying to meet his quota really cares?

Q: Let’s jump into your survey. It’s obviously a sampling, but I’m wondering if you had any estimates as to how many consumers are really in trouble out there?

A: I couldn’t really tell you exactly how big a problem it is out there. Bankruptcy filings, however, are below 50 percent of what they were prior to the rule changes. And when you talk to the credit counseling industry and the debt settling industry, neither one of those industries really report a huge swell in activity. So, there is a question of where are these distressed consumers. Have they gone underground? Everyone seems to be reporting increases in delinquencies, but they’re not necessarily cutting into bankruptcy and they’re not necessarily going into bankruptcy alternatives.

Q: Looking at your data, I was amazed that women and seniors were the ones seeking out your help the most.

A: I think what I’d like to see come out of my research are policymakers, academics, and the research and business communities really looking at the underlying causes for why we’re seeing older Americans financially distressed. Are they afforded the same economic opportunity at a fresh start than younger people have? That was the whole concept behind our Founding Fathers putting into the constitution the right for Congress to enact bankruptcy laws. They were all coming from places that had debtors’ prison. They kind of had a little baggage there.

And then what we saw with women is just as fascinating. I was just really surprised, because, representative of the population, 49 percent are male and 51 percent are female. Yet, women made up 53 percent of those going into bankruptcy.

Q: Was there anything else that surprised you about the findings?

A: When we asked folks to self-identify their causes for financial distress, I threw out identity theft just to see what it’d shake out of the tree. It was the lowest reported number, but it’s fascinating that 2.3 percent of the 24,000 people surveyed said identity theft was one of the reasons they were going bankrupt. No one should ever end up in bankruptcy because of identity theft.