Bankruptcy in Fat Days
The U.S. economy hummed along nicely last year with solid growth, low inflation and high employment--but more Americans filed for bankruptcy than ever before. Every year the number goes up, people seeking refuge from creditors under the nation’s bankruptcy laws. This worrisome trend is finally getting some attention in Washington, and that could--and should--lead to changes that will make it harder to legally walk away from debts.
In 1997, a good economic year, a record 1.4 million people and businesses filed for bankruptcy, up 19.1% from 1996. Of that total, personal filings rose 20% to a record 1.35 million and business filings edged up 1% to 54,027, according to the American Bankruptcy Institute, which compiles data from government records.
The cause? A combination of irrational spending by consumers and irresponsible extension of credit by lenders. Congressional Budget Office data show that bankruptcies have been rising in line with the increased debt incurred by households since the mid-1980s.
Changes in the bankruptcy law in 1978, which were supposed to better balance the interests of debtors and creditors and give filers a fresh start, have shifted the burden of some debt onto creditors. That has essentially lifted the traditional social stigma of bankruptcy.
Debt-plagued consumers can file for bankruptcy under either Chapter 7, which excuses them from repaying unsecured debt such as credit card bills, or Chapter 13, which requires filers to comply with repayment plans. Under either scenario, assets such as home equity and other personal property are shielded from liquidation.
Credit card companies, banks and other lenders are pressing for changes to make filers more accountable under Chapter 7. They are backing a proposal by Reps. George W. Gekas (R-Pa.) and Bill McCollum (R-Fla.) to establish a needs test, a formula to assess whether a filer can repay debts or truly needs relief.
This would be helpful but it does nothing to close the loopholes exploited by determined deadbeats. To deal with them requires capping exemptions that allow debtors to hide assets. Debtors should also be restricted from filing repeatedly, which tends to confuse creditors, a ploy widely used in California. Random audits would help spot abuses. Rep. Jerrold Nadler (D-N.Y.) has proposed similar measures.
House and Senate subcommittees will each hold hearings on proposed bankruptcy legislation next week. Reform is necessary, but care must be taken to maintain the rights of those who file out of genuine hardship, such as prolonged joblessness, medical problems or divorce.
Obviously, banks, credit card companies and other lenders should be more judicious in extending credit. Their loans are often based not on credit histories but on some presumed ability to pay. No wonder bankruptcies are up.
