NCPA - National Center for Policy Analysis

Bankruptcies Filing Escalate

October 4, 1996

More than a million households will file for bankruptcy this year despite low unemployment and a relatively strong economy. Critics say that bankruptcy reform laws in the 1970s made bankruptcy more convenient -- and that the laws should be tightened.
  • The bankruptcy filing rate this year will be eight times higher than during the Great Depression -- with one household in every 100 going the bankruptcy route.
  • The households will receive an average of $11,000 in forgiveness -- while the average bill-paying family will pay $100 extra in higher prices and interest to cover those losses.
  • A Visa survey found that 29 percent of filers complain they are "overextended," 17 percent cite health problems, 15 percent name job problems, 12 percent say divorce is the reason -- and 6 percent say they just can't stand bill collectors.
  • Non-mortgage consumer lending has jumped 44 percent in three years -- with the average household owing $12,500 in such debt.

Experts say the problem is most acute among households making $50,000 to $100,000 annually, making it one of consumer attitudes rather than dire economic straits.

Supposedly, those filing under Chapter 7 of the federal bankruptcy code have to liquidate their assets. However:

  • They can keep pension plan money and $50,000 equity in their homes.
  • Most keep their cars as well.
  • And in 90 days they are released from other consumer debt -- and most find they are creditworthy again.
  • But those filing under Chapter 13 -- which calls for repaying creditors -- must turn over their income to a trustee and live on an allowance for up to five years, prompting 70 percent of filers to choose Chapter 7.

Congress has created a National Bankruptcy Review Commission which will hold hearings next month and report recommendations for possible changes in the law by next fall.

Source: Editorial, "Too-Easy Bankruptcy Laws Give Abusers a Free Ride," USA Today, October 4, 1996.

 

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