Financing their champagne tastes

0 Comments | Insight on the News, March 9, 1998 | by Keith Russell, | David Wagner

Needless to say, the suggestion that stiffing creditors ought to be made easier outraged lenders who wanted to see tougher standards for filing under Chapter 7 guidelines that effectively "wipe away" all debts owed. Lenders favored requiring more filings under Chapter 13 guidelines, which require at least some repayment during a period of up to five years. When the Bankruptcy Review Commission approved the final draft of its report, the commission was split 5-4, and one commissioner -- Judge Edith Jones of the U.S. Court of Appeals for the 5th Circuit -- was so dissatisfied with the leniency shown by the report that she wrote a 100-page dissent.

"It seemed to me in its final analysis, the commission was not sufficiently impacted by the rising tide of filings," says Gekas. "In fairness, [the sharp increase in filings] may have come when they were completing their work. But even to that extent they didn't consider it an emergency."

The credit corporations avidly may be granting credit wholesale to many who are not good risks, but they are serious enough about this legislative battle: They have enlisted such political heavyweights as former Republican National Committee chairman Haley Barbour and former Treasury secretary Lloyd Bentsen in the cause of creditor-friendly reform.

Three separate bills are moving through House and Senate committees. Though they agree on some elements -- the need for better education of debtors about alternatives to bankruptcy and whether Chapter 12 protections should be extended to the owners of family farms -- they differ about the degree and methods of reform. Indeed, they even disagree about what is responsible for the bankruptcy surge.

For Gekas and Reps. Rick Boucher and Jim Moran, both Virginia Democrats, and Florida Republican Rep. Bill McCollum, all sponsors of the Bankruptcy Reform Act of 1998, one pressing need is to restore the stigma once linked to bankruptcy According to AFSA's Sprang, "It has become socially acceptable to file for bankruptcy and use it as a form of financial planning."

Under current law, little incentive exists to keep consumers from running up large debts, filing bankruptcy under Chapter 7, stiffing lenders with sufficient frequency to put the price of credit-card debt at 20 percent and then walking away with a clean slate to bilk someone else. All that stands in the way is a clause allowing a trustee of the court to move to deny a debtor's Chapter 7 petition when evidence exists to prove the consumer's claims constitute "substantial abuse" of the system. This is uncommon.

Now, to the applause of creditors and responsible cardholders alike, Gekas' bill would ensure that those who could pay at least some of their debts would be ineligible for Chapter 7, but could file under Chapter 13. Termed a needs-based approach, the bill would disqualify from Chapter 7 any consumer who makes 75 per-cent of the national median income and could pay at least 20 percent of his or her unsecured debt (such as credit cards) during the next five years. The approach is based in large part on a study by Georgetown University's Credit Research Center, or CRC, which concluded in a review of the bankruptcy-court records in 13 U.S. cities that as many as 25 percent of Chapter 7 filers could afford to pay back at least 30 percent of their unsecured obligations.