NCPA - National Center for Policy Analysis

Law Would Make Bankrupts Pay Their Debts

October 4, 1998

Congress is about to make it more difficult for high-spenders to avoid their debts. But it is unclear whether President Clinton will sign whatever legislation the House and Senate agree to.

Under current law, debtors can avoid their creditors by filing under Chapter 7 -- which allows them to escape many of their debts. The new law would force debtors to pay back up to 30 percent of their credit card bills.

  • Nearly 1 million Americans filed under Chapter 7 for bankruptcy protection last year, with almost 400,000 more opting for Chapter 13 -- a near-doubling of filers in both categories since 1990.
  • The House version of bankruptcy reform would require filers who earn more than the median income -- $17,900 for a single person or $51,000 for a family of four -- to pay back a portion of their credit card debts by going into Chapter 13.
  • The Senate version leaves some discretion to bankruptcy judges.
  • Reforms would save the credit card industry an estimated $4 billion or more a year.

Experts say the test of any new law would come with the next recession. The reforms are part of a broader strategy being pursued by the credit card industry to prepare for the next economic downturn.

Source: David Cay Johnston, "Narrowing the Bankruptcy Escape Hatch," New York Times, October 4, 1998.

 

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