NCPA - National Center for Policy Analysis

Reforming Laws That Allow Deadbeats To Escape Bills

May 14, 1998

Congressional Republicans are trying to tighten the nation's bankruptcy laws, which critics say allow people who are capable of paying their debts to escape them. Both houses of Congress could vote on separate versions of bankruptcy reform legislation as early as next week. President Clinton and congressional Democrats are opposing the reforms, however.

  • The legislation would require those filing for bankruptcy to be means-tested -- with those who have sufficient funds being steered into Chapter 13, where they would be put under a court-ordered repayment plan, rather that being allowed to file under the more lax Chapter 7, where debt is often voided.
  • Debtors would be subjected to Chapter 13 if they earned at least 75 percent of the nation's median income -- currently about $39,000 a year -- and had the ability to repay at least 20 percent of their debt over five years.
  • Supporters estimate that of the 1.37 million people who filed for bankruptcy last year, 15 percent had the means to pay their debts.
  • They say this amounted to about $4 billion in forgiven debt -- which is eventually passed on to consumers in the form of higher prices and interest rates.

From 1996 to 1997, the number of bankruptcies increased by 23 percent, despite the booming economy -- and is expected to increase again this year.

Reform advocates contend bankruptcy has become too easy and that some people even use it as a financial planning tool.

Opponents complain that the legislation would put credit card companies on an equal footing with single parents who are trying to recover alimony and child-support payments. Clinton and other Democratic opponents are building their case around the charge that the reforms will hurt children. Republicans counter that the bill's final language, as amended, protects children.

Source: Katharine Q. Seelye, "Panel to Vote on Measure to Tighten Bankruptcy Laws," New York Times, May 14, 1998.


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