Washington's role in the consumer debt crisis

Discount Store News, May 5, 1997 by Ken Rankin

One of the biggest threats to the future of the retail industry may not be coming from Washington, but rather from the bankruptcy courts.

Despite a healthy and growing economy, personal bankruptcies are on the rise across the country, and a number of major chain retailers are taking it on the chin.

When consumers who can't pay their bills file for bankruptcy through Chapter 7, all of their outstanding debts are discharged, and their creditors are left holding the bag. For retailers, that bag is getting heavier all the time.

Late last month, when a subcommittee of the Senate Judiciary Committee held hearings on the problem, Dayton Hudson's Donald Banks gave Congress an earful about how the current ground rules create a damned-if-you-do, damned-if-you-don't situation for retailers.

One one hand, retailers have an interest in extending credit to all consumers who are capable of paying their bills and using credit responsibly. On the other hand, retailing has an equally strong interest in avoiding undue credit risks that drive up costs for all consumers.

One possible solution being talked up on Capitol Hill involves shifting from the present system to one calling for needs-based bankruptcies.

Under this approach, consumers would be entitled to file under Chapter 7 of the bankruptcy code only if they can demonstrate that it is absolutely necessary. Otherwise, they would be required to file under Chapter 13--a far more restrictive standard under which consumers must repay at least a portion of their outstanding debt.

While this would ease the burden somewhat for retailers and other creditors, it wouldn't attack the root causes of the upsurge in personal bankruptcies. Truth is, many are forced into bankruptcy proceedings as a result of inappropriate (and sometimes illegal) collection by (gasp!) the Internal Revenue Service.

While Dayton Hudson and other retailers were testifying last month, tax professionals were at separate hearings informing the National Commission on the Restructuring of the IRS, chaired by Rep. Rob Portman, R-Ore., of the abuses that taxpayers suffer at the hands of federal tax collectors.

One of the worst is the IRS practice of requiring delinquent taxpayers to effectively turn over all their income to the agency, except for a miserly allowance for living expenses which, experts say, is set absurdly low.

Indeed, former IRS agents told Portman's commission that the dramatic increase in the number of personal bankruptcies since January 1996, despite a very strong national economy, may be attributed in part to unrealistic IRS national and local standard expense allowances for housing, utilities and other living costs. Many tax practitioners have been forced to recommend that their clients seek the protection of the bankruptcy court, they said.