Creditors Unite to Seek Tougher Bankruptcy Code

Article excerpt

A large, widely diverse group of lenders have set aside long- standing differences and have banded together to accomplish one common goal: Revamp the nation's bankruptcy laws.

While many members of this bankruptcy reform coalition normally disagree on nearly everything -- sometimes to the point of suing each other -- on this one issue they are singing the same tune. There is a fundamental flaw in the nation's bankruptcy code, they chorus. At a time when personal bankruptcies have hit record levels, that flaw must be fixed -- and soon.

This powerful group -- its members include the American Bankers Association, the Credit Union National Association, the National Retail Federation and the American Financial Services Association, among others -- are lobbying legislators and members of a bankruptcy reform commission, which plans to release a report in October on ways to overhaul the current bankruptcy code. They are also working diligently to explain that bankruptcy affects nearly everyone in the country. That's simply because the estimated $30 billion in bankruptcy losses are passed on to consumers through higher interest rates and fees. The cost of bankruptcy: Roughly $300 per person, per year, the creditors agree. The most obvious symptom of the systemic ills shows up in annual bankruptcy statistics released by the Administrative Office of the U.S. Courts. In 1996, a record 1.1 million individuals filed bankruptcy -- that's up a walloping 27 percent from a year ago. However, what creditors find more troubling is the type of bankruptcy that's most prevalent. Roughly 70 percent of all personal bankruptcies are so-called Chapter 7, or "liquidation" filings. Under Chapter 7, consumers who are willing to sell their "non- exempt" assets are able to wipe out the vast majority of their debts. But a study done by the Credit Research Center at Purdue University found that nearly half of all Chapter 7 bankruptcy petitioners had the ability to pay a fairly substantial portion of their debts from income. Indeed, Purdue scholars looked at hundreds of income and debt statements filed in U.S. bankruptcy court and found that 5 percent of the Chapter 7 petitioners had the wherewithal to pay off all of their debts within six months of filing, says Philip Corwin, principal of Federal Legislative Associates, a Washington, D.C., government relations firm that represents the ABA. Another 40 percent would have been able to pay off an average of one-third of their debts within a three year period. That would suggest that roughly 45 percent of the Chapter 7 debtors should have filed a Chapter 13 petition, which establishes a payment plan to pay back all or a portion of the debtor's obligations. …