An estimated one million Americans declare bankruptcy each year.
However, growing awareness of bankruptcy law abuses could lead President Bush to sign a bankruptcy reform bill, which would extend debtors’ responsibilities and offer credit card companies more freedom in collecting their dues.
Today’s risk groups not only include rich entrepreneurs and middle-aged debtors, but also young people drawn into debt by easy access to credit.
Out of 1.2 million personal bankruptcies filed last year, nearly one-half were filed by people under the age of 35. This constitutes an increase of more than 40 percent since 1991, according to Harvard Law School studies. With overall bankruptcy rates up 20 percent in the first three months of 2001, these numbers are expected to grow even higher.
In Tennessee, the relative number of personal filings led the nation last year, according to the American Bankruptcy Institute. One in 43 Tennessee households filed bankruptcy in 2000, primarily under Chapter 13, compared with 1 of 83 in California and 1 in 118 in both New York and Connecticut.
Chapter 13 requires debtors to pay off all or part of their debts within three to five years, while the more lenient Chapter 7 does not require paying loans, but may involve loss of one’s property.
Nationwide, 70 percent of all personal cases are filed under Chapter 7, according to the New York Times. Last year, however, judges steered more debtors into the less protective Chapter 13.
“There is nothing in the [currently enacted] bill that prohibits anybody from filing,” Jeff Tassey, a lawyer in Washington, D.C., told the Nashville Tennessean. Tassey, who leads the Coalition for Responsible Bankruptcy Laws, said the “abuses have piled up to the point where something had to be done.”
Critics of the revised bankruptcy bill working its way through Congress said the bill would protect credit card companies by holding consumers responsible for the companies’ unusually high credit lines.
“The bankruptcy court … could become nothing more than a glorified collection agency,” read an article on Salon.com.
Lower- and middle-class people whose companies closed or down-sized are those most affected by bankruptcy laws, Lawrence C. King, bankruptcy law professor at New York University, told the Times.
“Something happens that throws their lives out of kilter,” said King.
According to the data gathered for the National Conference of Bankruptcy Judges, based on 3,151 cases filed in 1998, the median household income for personal bankruptcies was $21,540, which is about $15,000 below the national median income.
Nothing in the bankruptcy reform bill addresses the credit card industry’s marketing bombardment, read the article on Salon.com. And while experts say high illiteracy rates contribute to poor financial decisions, the proposed bill will neither address this issue nor lower the currently high rates of bankruptcy filings.
“Changing the bankruptcy laws will not change who goes into debt; it will change where the money goes,” Elizabeth Warren of Harvard Law School told Salon.com. “This debate is ultimately about an allocation of wealth. If the banks can squeeze 35-year-olds harder, the banks will get richer and the 35-year-olds will get poorer.”
Harsher bankruptcy laws would not deter filings because most people do not consider bankruptcy until they have no other choice, argued Warren.
“If the idea is to make it harder [and] more expensive for people to file for bankruptcy, this is a successful legislation,” Hank Hildebrand, Chapter 13 trustee with the Middle Tennessee Federal Bankruptcy Court, told the Tennessean.
Before the new bill begins battling high bankruptcy rates, it has to address and educate both the potential debtors and the credit card companies.
Warren said Congress could make a difference by forcing credit card issuers to explain the terms of what are essentially high-interest loans.
Alex Smirnov is BCE’s research associate.