Editorial
Bankrupt Policy
Bankrupt Policy
If you borrow something and refuse to give it back, that is stealing. But that's what bankruptcy law lets people do. It lets people borrow money, and then declare that they are broke, and then they don't have to give the money back.
I was once on the board of directors of a credit union. Every month, we would get a report from the manager of loans that were written off. Most of these were from borrowers who had declared bankruptcy. This was money borrowed from our members who had deposited funds for their savings. Other members borrowed the money, and now they were not going to pay it back. The money was gone. To make up for the lost money, we had to charge higher interest for loans and pay lower dividends to depositors. When people owe money to businesses and don't pay it back, the cost is paid by consumers in higher prices. The bankruptcies are therefore transfers of money from borrowers, consumers, and savers to the bums who borrow money, spend it, and then do not pay back. The financial cost is about $44 billion per year.
Some folks borrow money intending to pay it back, and then they fall into hard times. They lose their job. They get divorced. They get sick. Bankruptcy law is ideally intended to let these folks handle their debts in an organized and humane way, rather than being hounded by collection agencies and thrown into the streets. We don't want children to beg for food in street corners because their parents are broke and can't feed them.
The problem is that bankruptcy law has gone to the other extreme. Some people borrow lots of money, spend it, and then declare bankruptcy so they don't have to pay it back. This is fraud and theft, but to some folks, it has become an acceptable financial tool. Some 1.4 million Americans filed for bankruptcy last year. Consumer bankruptcy has been growing rapidly during the past few years even though the economy has been booming.
Currently, there are two major ways of declaring bankruptcy under federal law. In a Chapter 7 bankruptcy, usually all unsecured debt is canceled. In a Chapter 13 bankruptcy, the debtor agrees to a plan to pay off at least some of the debt. Some people who could file under Chapter 13 have been filing under Chapter 7, and judges let them get away with it in order to preserve their high lifestyle (see www.ncpa.org/pd/law/law.html). Only 30 percent of personal bankruptcy filings are under Chapter 13.
Policy should steer towards the middle, letting those who fall on hard times get their lives back in order, while avoiding fraud by greedy bums who take advantage of the system. Congress has set up the National Bankruptcy Review Commission to recommend reforms. Two bills were introduced in Congress in February 1998 (H.R. 3150 and H.R.3146) to reform the bankruptcy system. I don't necessarily favor them, since whether a reform is really an improvement depends on the details, and some of the details may create other problems (see the details in www.abiworld.org/legis/legisnews.html). Changes that would add bureaucratic requirements or put mortgages, car loans, and child support on an equal basis with credit card debt do not seem fair. Also, bankruptcy should not be more lenient with corporate debt than with personal debt (see the "Focus on the Corporation" columns in www.essential.org/monitor).
A just bankruptcy policy would not let any debts expire unless the lender agreed. An overwhelmed borrower could arrange with a bankruptcy court on a plan to prioritize his debts and make reasonable payments, and child support should have a top priority. Justice can steer us between the extremes of putting the poor into greater distress and letting big spenders freely use other people's money.