Bankruptcy: Best Reform Is a Stiff Dose of Discipline

Whatever happened to living within one’s means? Ask consumers and lenders and now the National Bankruptcy Review Commission.

The nine-member congressional commission was supposed to come up with recommendations to revise federal bankruptcy law and close loopholes that critics say favor debtors. However, many debtors would come out ahead if Congress were to adopt certain recommendations among the 170 that the panel has offered. As it is, bankruptcy filings continue to go up, and the majority of those filing simply walk away from their debts.

Easy credit long ago made pay-as-you-go personal financing unfashionable. Now it has become increasingly acceptable to raise the shield of bankruptcy as a money management tool, rather than only when some personal catastrophe plunges a household into financial straits. A record 1.3 million households are expected to file for bankruptcy this year--that’s in a healthy economy--at a cost of $40 billion to lenders. Personal bankruptcies in California also will hit a new high this year.

The goal of bankruptcy reform is to balance the interests of debtors and creditors. The commission’s recommendations--though some proposals are highly controversial--do provide a foundation for reform efforts, which have already begun in Congress. Neither consumer groups nor lenders and credit card companies are happy with all of them, which suggests a good balance.

The panel’s most controversial recommendations include:

* Loosening rules on unsecured credit card charges. Currently, debtors remain liable for charges made 60 days or less before the bankruptcy. The commission would cut that period to 30 days.

* Forgiving most types of student loans, which under current law cannot be erased until seven years after graduation.

Other recommendations would make the personal bankruptcy system fairer and more efficient. The commission would make bankruptcy filings subject to random audits for fraud and institute a nationwide system for debtor education. Uniform national standards would be established on the amount of personal property that could be retained after bankruptcy. The amount now varies from state to state.

Lenders and credit card companies are complaining loudly about the proposals, but they in fact are often the source of looming bankruptcies with their loose approach to extending credit. Discipline is in order on all sides of this issue.