Magazine article Management Review

Till Debt Us Do Part

Magazine article Management Review

Till Debt Us Do Part

Article excerpt

Personal bankruptcies hit a record high last year, costing the U.S. economy plenty. Now Washington wants to reform the practice.

An epidemic is sweeping America. Last year it infected some 1.3 million individuals. The scourge is bankruptcy; and while those who declare it and suffer its consequences are likely to survive, they are leaving a path of destruction in the nation's economy.

Indeed, its economic impact has been striking. In 1996, U.S. bankruptcy filings passed the 1 million mark for the first time. And not by any means is it an exclusively American phenomenon. For example, Statistics Canada reported last June that personal bankruptcies there were running at a record pace of more than 7,000 per month, up 14 percent over the prior year.

"It seems that filing for bankruptcy has lost its stigma," says Nancy Ness Judy, spokeswoman for the American Bankers Association. "It used to be that personal responsibility was an issue of pride. Now bankruptcy seems to be an easy way out to take care of certain forms of consumer debt."

Figures from the American Bankers Association show that personal bankruptcies cost the U.S. economy some $30 billion in unpaid debt in 1996 and were projected to hit $40 billion by the time 1997's figures were tallied. Moreover, bank credit card issuers Visa and MasterCard estimate that their member banks lost $8 billion to $10 billion to personal bankruptcies in 1996.

Now Washington is taking action to change the pace, the nature and the consequences of bankruptcies. Bills filed in Congress have been designed to bring more personal responsibility to the filing of bankruptcies. Meanwhile, the bipartisan National Bankruptcy Review Commission (NBRC) - which Congress established in 1994, prior to the Republican victory in both houses - has recommended some sweeping changes in federal bankruptcy laws and practices.

"We need to return to the concept of what bankruptcy is all about," says Representative Bill McCollum, R-Fla., sponsor of the principal House measure dealing with bankruptcy reform. "Bankruptcy is designed to protect the consumer from the creditor while encouraging people to pay off debt. That's what our reform efforts are all about."

Bankruptcy by the Book

Personal bankruptcy comes in two forms: Chapter 13 and Chapter 7, references to sections of the federal bankruptcy code. Chapter 13 is the personal form of Chapter 11. (The most commonly cited form of bankruptcy, Chapter 11 applies only to corporations seeking protection from creditors while they reorganize, with the expectation of returning to profitable operations.) Under Chapter 13, an individual files a plan with the court for repayment of debt over a period ranging from three to five years, during which time the hounds of the creditors are called off. In theory at least, the individual emerges with his or her credit largely intact.

Not so with Chapter 7. Under this provision, all debts are immediately purged in a process akin to total absolution. The individual's assets are liquidated and the proceeds distributed among creditors, which thereafter lose virtually all ability to recover any more of what's owed them. Yet, for as much as a decade or more, the stigma of bankruptcy remains on the individual's credit history, making it often impossible but certainly expensive to receive credit of any type. Not surprisingly, however, this is the form of bankruptcy that the vast majority of people who pass through the federal court system select.

"Thirty percent of those declaring bankruptcy choose Chapter 13, while 70 percent choose Chapter 7," says David Sandor, director of public affairs for Visa USA, which keeps close watch on bankruptcy filings in the United States. "Unfortunately, in 95 percent of Chapter 7 filings, there are no assets to liquidate. So creditors often get very little."

Debating Thresholds

The McCollum bill addresses the type of bankruptcy an individual should be permitted to file. …

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