Bankers Cite Insolvency Flaws

Bankers urged a federal panel Tuesday to fix serious flaws in the law that allow consumers to wipe away their debts even if they have the resources to repay some of their obligations.

Reform supporters presented research that suggests a significant number of consumers were being granted full relief of their debts under Chapter 7 bankruptcy protection when they would have qualified for a repayment plan.

Chapter 7 of the U.S. Bankruptcy Code, which wipes out all debts, is used in 70% of personal bankruptcies. Consumers who seek to repay some of their debts file for relief under Chapter 13 of the code.

“Billions of dollars of relief wastefully are being provided to consumers each year when they don’t need it,” said Michael F. McEneney, an attorney representing a coalition of banks and credit card issuers.

McEneney and other industry representatives testified before the National Bankruptcy Review Commission as the banking industry scrambles to respond to a record 1.1 million bankruptcies filed in the year ended Sept. 30.

The congressionally appointed panel is holding a series of hearings as it prepares to report on suggested reforms by next October.

Bankers have cited escalating bankruptcies as a key problem in the credit card industry, which saw the percentage of delinquent credit card loans jump to 4.5% in the July-September period.

Purdue University professor Michael Staten said a sampling of personal bankruptcies in 12 U.S. cities showed 45% of people who filed Chapter 7 protection had income, after expenses, to repay some of their debts.

Staten’s research was sponsored by Visa and MasterCard.

Economists suggest that changes be made carefully, because increasing availability of unsecured credit in recent decades has been a major factor in economic growth.

Consumer groups say banks have fueled the bankruptcy problem by flooding consumers with credit card solicitations in an aggressive bid for business.

They also note that banks are still profiting from credit card business.

The National Consumer Law Center, a Boston-based group, accused bankers and credit card lobbyists of “scapegoating the bankruptcy system for losses caused by the industry’s own marketing of easy credit.”

“Families get suckered by teaser rates” and offers of low minimum payments, said Robert Hobbs, the center’s deputy director. “It’s terribly cynical of them to try to close the court system to many of the families who have been hurt.”