NCPA - National Center for Policy Analysis

Bankruptcy: Today's Fashionable Fad

March 13, 1998

Bankruptcy lawyers are clamoring for clients -- and finding plenty of them. Legal escape from one's debts no longer carries the social stigma it once did, and a record 1.4 million Americans filled out bankruptcy papers last year.

  • Consumer bankruptcy filings shot up 29 percent from 1995 to 1996 -- then jumped another 20 percent last year.
  • Such bankruptcies cost the financial sector $44 billion last year, according to the Wefa Group.
  • If those losses are being passed along to other consumers in the form of higher prices and interest rates -- which seems likely -- each household is paying an additional $400 a year to cover the debts.

Those wishing to declare bankruptcy have two choices under federal law.

  • Under Chapter 7, a debtor liquidates assets to pay off creditors, and all unsecured debt is cleared -- even if assets don't cover it.
  • The Chapter 13 route allows consumers to agree to a court-approved plan to pay off all or part of their debt within three to five years.

Experts report that even people with enough income to repay all their debts often file under Chapter 7 to avoid repaying.

In one widely noted case, a Philadelphia couple with a combined annual income of $75,000 filed under Chapter 7. They were sending their children to private school at a cost of $7,500 a year and driving a rented Mercedes.

A judge ruled the couple were not abusing the statute, explaining that "the debtors are persons who became accustomed to living with the amenities of the upper-middle-class, and have been unable to completely adjust themselves to a somewhat altered financial depression." The case has been cited as a precedent at least twelve times.

A bill in Congress to reform the system by means-testing Chapter 7 debtors has attracted the sponsorship of 137 Republicans and 44 Democrats.

Source: John Berlau, "Bankruptcy: A New Entitlement?" Investor's Business Daily, March 13, 1998.


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