Before Sept. 11, the federal government was on the verge of significantly increasing the burdens on those who seek relief through bankruptcy. But after the attacks on the World Trade Center and the Pentagon, and after the dramatic slowdown in the American economy became more apparent this fall, congressional leaders put passage of the Bankruptcy Reform Bill of 2001 on hold, largely out of fears that legislators not seem "anti-consumer" amid growing unemployment. They would do well to keep the bill bottled up in conference through the rest of 107th Congress.
The Bankruptcy Reform Bill of 2001, versions of which have passed both the House and Senate by large majorities, seeks to channel a greater percentage of individual bankruptcy applicants into Chapter 13, where they would still have pay a percentage of their debts. It also would give creditors new legal weapons with which to contest both personal and commercial bankruptcies, and would make it more likely that financially troubled businesses would face liquidation rather than reorganization.
Press coverage of this legislation has generally stressed the lobbying efforts of the credit card industry, which stands to gain handsomely from its passage. But the intellectual basis offered for bankruptcy revision also deserves scrutiny, especially in light of America's experience with bankruptcy law. Congressional supporters of the pending legislation, mostly Republicans joined by Democrats from all wings of the party, argue that America is experiencing a bankruptcy epidemic. They note that between 1980 and 1998 -- a period of considerable prosperity -- annual filings grew more than 350%, reaching a high of over 1.4 million, or more than one in a 100 households.
They further maintain that this dramatic expansion has resulted partly from the aggressive marketing of bankruptcy as a financial planning tool by lawyers and accountants, and partly from a diminished social stigma associated with the failure to pay one's debts, leading ever more individuals and businesses to "game" the system. Finally, advocates of the pending bankruptcy revisions insist that they do not weaken America's longstanding commitment to furnish "fresh starts" to honest bankrupts. When put in their historical context, each of these assertions is open to serious question.
Consider the claim that something must be amiss, because bankruptcies have risen so much during good economic times. Throughout the 20th century the fastest growth in the rate of personal insolvencies has typically occurred during economic booms, especially when businesses have embraced new mechanisms of consumer finance and have been willing to extend credit to an ever larger proportion of the population. Before the recent uptick in bankruptcy applications, two similar periods of mushrooming insolvencies have occurred -- one during the roaring '20 and one during the 20 years of general prosperity that followed World War II. In the 1920s department stores generously offered credit to customers and millions of Americans bought electric appliances and automobiles for the first time, usually through installment plans. In the 1950s and early- to mid-'60s millions more Americans borrowed heavily to buy homes and cars, while the credit card greatly expanded the world of consumer credit.
Contemporary analogies abound, including the extension of credit cards to segments of the population that previously could not get them, a surge in "subprime" lending, the emergence of the "no down payment" mortgage, and the explosion in medical care provided on credit to individuals without insurance. Rather than constituting an anomaly, the recent explosion of consumer bankruptcy fits within a larger historical pattern.
The historical record similarly casts doubt on the assumption that the social costs once associated with bankruptcy have all but vanished. For close to two centuries critics of America's approach to bankruptcy have been lamenting the lessening of the stigma associated with failure to pay one's debts, particularly during periods when credit flows expanded rapidly. …