BANKRUPTCY LAWS ENCOURAGE FRAUD AND ABUSE
March 18, 2005
Supporters of lenient bankruptcy laws say that honest, but struggling debtors need to be protected so that they can start all over again without any debts, giving them a fresh start.
According to law professor Elizabeth Warren:
- Some 87 percent of bankruptcies are caused by events that may be out of an individual's control, such as loss of employment, medical expenses and divorce.
- More than half of all bankruptcies are linked to medical costs; however, her study is controversial in part because its trigger for medical expenses is just $1,000.
Meanwhile, reformers stress that people are taking advantage of the law, citing a rise in borrowers who spend money that they never intend to repay. Last year there were more than 1.1 million "fresh start" bankruptcies, more than double the number filed in 1994.
Todd Zywicki, law professor at George Mason University, says that financial distress cannot explain the surge in bankruptcies in recent years:
- Since 1978, when Congress liberalized bankruptcy laws, the rate of bankruptcies has risen from about 100 per 100,000 people to more than 500 per 100,000 in 2000.
- He believes the generosity of the bankruptcy code, which makes it too easy for people to escape paying their debts, is the primary reason for the surge in personal bankruptcies.
Source: Leslie Eaton, "Bankruptcy, the American Morality Tale," New York Times, March 13, 2005.
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