‘Last Resort’ Is Coming First
Something is haywire in the way Americans deal with personal debt. How else to explain the record bankruptcy filings in California and other states with strong job growth, decreasing unemployment and much improved economies?
The statistics are alarming. In the second quarter of this year in Los Angeles and Orange counties, bankruptcies were up 21.4% and 12.6%, respectively, compared to the same period last year. America is heading toward a new record in personal bankruptcies, and some estimates indicate that about $30 billion in deadbeat debt will be absorbed, written off or passed on to the vast majority of Americans who doggedly meet their financial obligations.
Much of that debt relief is simply unwarranted. Experts say that about 45% of Americans who seek complete relief from their debts through Chapter 7 personal bankruptcy filings could afford to pay off an average of one-third of their debts within three years. The Journal of Consumer Studies reports that 64% of those filing are employed full-time and 23% hold managerial and professional positions.
Banks and credit card companies say escaping debt through bankruptcy has become too easy, yet they continue to lure customers with credit that is unneeded or ought to be avoided. Lawyers blame the lenders, despite the fact that some of their legal colleagues have helped de-stigmatize the choice of bankruptcy with advertisements promising debt-free starts for as little as $100.
The National Bankruptcy Review Commission should offer the president and Congress some concrete proposals to control the problem. The commission might be tempted to concern itself with expanding protections for debtors while ignoring those who are owed.
The panel ought to press for the following: tougher requirements on debt repayment, consumer counseling through nonprofit groups, a system to track and prevent repeat bankruptcy filings, and incentives to encourage more people to file for Chapter 13 bankruptcy, which requires some payments to creditors over three to five years.
Such steps might help swing the pendulum back to the time when bankruptcy was considered an option of last resort, rather than one of first consideration.
