Bills seek to slow bankruptcy filings

Nation's Business, March, 1998 by David Warner

Bankruptcy filings in the United States in 1997 were projected to top 1.4 million and to cost creditors -- most of them businesses -- more than $40 billion. Because the number of filings has continued to rise in recent years, legislation has been introduced in both the House and Senate to tighten the bankruptcy law.

Reps. Bill McCollum, R-Fla., and George W. Gekas, R-Pa., are urging action during this session of Congress on their bankruptcy-reform measures. A similar bill, sponsored by Sens. Charles E. Grassley, R-Iowa, and Richard J. Durbin, D-Ill., is pending in the Senate.

"This legislation is badly needed because consumer debt taken off the books by the bankruptcy system is not really erased," says Bruce Josten, executive vice president for government affairs of the U.S. Chamber of Commerce. "It is shifted to third parties, such as other households and businesses, in the form of higher prices and higher interest costs."

The McCollum, Gekas, and Grassley-Durbin bills would make modifications to a 20-year-old federal law that many critics blame for a dramatic rise in bankruptcy filings.

The Bankruptcy Reform Act of 1978 made it more attractive to file under Chapter 7 of the bankruptcy code. Chapter 7 allows individuals or businesses to rid themselves of nearly all of their debts regardless of their ability to them. In contrast, Chapters 13 and 11 (the latter is used mostly by businesses) allow for the repayment of debts over three to five years under a plan worked out by a debtor, creditors, and the courts.

Since the 1978 act took effect, the number of bankruptcy filings by consumers has skyrocketed. (See the chart at left.) According to the American Bankruptcy Institute in Alexandria, Va., 70 percent of the consumer bankruptcy filings have been under Chapter 7.

The House and Senate bills would make it harder for those with above-average income -- and the ability to repay their debts -- to use a Chapter 7 filing to shield their assets from creditors. The legislation also would ensure that creditors get adequate notice when an individual files for bankruptcy and adequate time to review a bankruptcy petition.

Also, it would improve information in the bankruptcy system by requiring filers, to provide tax returns and other financial documents to the courts.