A record 73,835 cases of consumer bankruptcy were filed in the three months April to June this year. If past recessions are anything to go by, there will be even more in the months to come. But it is just the economy pushing people to the brink?
Bankruptcy conjures up images of stricken borrowers, unable to cope with their mounting bills, turning finally and as a desperate last resort to the courts to get rid of their unmanageable debts. But according to the worried spokesman for the consumer finance industry, William Moroney of the National Consumer Finance Association, this picture is no longer true.
Last year's major revision of the bankruptcy laws -- the most important for almost 100 years -- has contributed to the "startling" increase in the number of individuals filing for bankruptcy over the last year, he believes.
The latest figures from the administrative office of the U.S. bankruptcy court show a jump of about 60 percent in the number of people filing for bankruptcy -- from 196,976 in the year through June 1979 to 314,905 (counting joint husband and wife cases as two) recorded in the latest year. Other figures suggest that the number could be as high 350,000. Some of the 73,835 nonbusiness bankrupts, filed between March and June were joint filings where husband and wife were counted as one.
Moroney agrees that the bulk of this increase is probably due to the recession. But changes in the law almost certainly have played a part, as well.
The Bankruptcy Act of 1978 -- which was signed into law in November 1978 and became effective last October -- was supposed to ease the burden of bankruptcy for debtors. But it has encouraged many people to file "unnecessarily" for bankruptcy, the National Consumers Finance Association says.
Attorney Richard C. Wills says however that the new law" presents a realistic approach in allowing a financially troubled individual to get a fresh start." He believes that the economy, and not the law, is to blame for the explosion in bankruptcies.
One important attraction of the new code for debtors is that is allows bankrupts to keep much more of their property than was common under the old law. The federal exemptions, for example, now enable people who file for bankruptcy to keep as much as $7,500 in equity in a house, $200 in each household item and $1,200 in a car.
In addition, finance companies cannot seize exempted household items in payment of a debt, even if they have been given as collateral. These provisions are much more generous than the exemptions allowed by most states under the old law, although a few -- most notably California and Texas -- have had even larger exemptions, particularly for equity in housing.
Under the 1978 act, debtors may choose between state and federal exemptions.
But the Senate insisted when the Bankruptcy Act was going through Congress that states be allowed to cancel this option so that their own exemptions would apply, overriding those set out in the new code.
So far about a dozen states including Virginia, have taken advantage of that provision, and more may join in as the view grows that the federal exemptions are encouraging a rash of bankrupticies.
Federal legislators aimed to get rid of some of the stigma surrounding bankruptcy for individuals and to protect debtors who have decided to bail out through the courts. They also wanted to make it easier for bankrupts, who could afford to pay off some of their debts, to do so without becoming liable for full repayment and without suffering the full consequences of a bankruptcy filing.
Consumers now can file under Chapter 13 of the new code, as well as Chapter 7. The latter is straight-forward bankruptcy. Under this, a bankrupt typically has all his debts discharged, those which are reaffirmed may not be considered again for six years, and the bankrupt may not file for bankruptcy again for seven years.
Those who file under this are saying "I give up," says Morney. But people with a regular income, who are able to keep up some monthly repayments, can decide to file under Chapter 13 for a kind of modified bankruptcy. They must put forward a repayment plan to the bankruptcy judge which sets out how much the bankrupt intends to repay to his or her creditors each month during the period of the plan. These usually run for three years but may go up to five years. There is no limit on how often someone may file under this chapter.
Harry Dixon -- who worked on the new law with its Republican sponsor, Sen. Malcolm Wallop of Wyoming, and who is now a bankruptcy lawyer -- believes that this is "where there have been abuses."
Some debtors have put forward plans for a "zero" payment to unsecured creditors. Others have been able to discharge debts which they could not have rid themselves of under Chapter 7. Dixon tells of an embezzler, declared bankrupt under Chapter 13 earlier this year by Judge H. F. White of Ohio, whose embezzled debts have been discharged.
But Wills pointed out last week that many proposed zero payment plans have been rejected by courts, as not being" in good faith."
The position of unsecured credit card companies, under the new law worries the National Consumer Finance Association. It believes that Congres did not intend to make it so easy for debtors to slough off their commitments to unsecured creditors. Moroney warns that unsecured credit may just dry up if the costs of giving it go on rising with more and more bad loans lost through bankruptcy. He suggests that credit companies may start to demand property as security for their cards.
However, there is clearly a long way to go before the risk on unsecured loans soars to such an extent that no one is willing to undertake it. There could be a lesson for creditors, Wills believes, who have lent money irresponsibly to poor credit risks.
The law may well be changed soon. A bill due to come before the House next week would lay down tighter rules for payment plans, so that judges no longer could accept small or zero payments.
Another change made by the 1978 act is that husband and wife now may file jointly for bankruptcy. Before the new act, a couple filing for bankruptcy was counted as two separate cases even if they filed a joint petition. They had to pay the $60 filing charge twice. Now they can share this and probably reduce their legal costs but also benefit twice over from the more generous exemptions. A bankrupt couple may keep $15,000 between them in property, for example.
This change complicates comparisons of filings before and after the act. The administrative office of the Bankruptcy Court, which gathers the figures on bankruptcies, suggests that the joint filings since last October should be counted as two to compare with earlier years.
The NCFA produces slightly different figures. It attempts to isolate consumer bankruptcies and exclude businesses. Whichever way the figures are presented, they show a big jump in both consumer bankruptcies and in the number of businesses going bust.
There are other provisions of the new law made to protect debtors which are leading to abuses, according to the NCFA. Creditors are not allowed to contact a debtor once the latter has filed for bankruptcy, for example. In the old days, a bankrupt was almost always harrassed by creditors, eager to make sure that they at least would get some money back.
Moroney believes that the new law goes too far in the other direction. It does not require debtors to tell their creditors what they intend to do about their particular loan, and it enables them to delay for so long that creditors will give up trying to get back their money.
Consumer credit lobbies, unsurprisingly, take a rather different view. Consumers filing for bankruptcy under Chapter 13 are showing themselves to be responsible, Wills believes. He also thinks that the Federal exemptions are not that generous, and that there remains a substantial disincentive to file for bankrupticies for most people.
Dixon nevertheless believes that more states will opt out of the federal exemptions, and set their own tougher rules about how much a bankrupt may keep. As this happens, he says, the recent increase in consumer bankruptcies will fall off.
But he too puts the main responsibility for the leap in bankruptcy filings on the poor performance of the economy. With people being laid off and credit tightening up in the spring, it was not surprising that more people turned to the courts as a way out, he says.
Dixon gives one other reason for this year's bankruptcy boom, along with the economy and the more generous provisions for debtors in the new code. He, as well as Moroney, put some of the blame for the rise on the advent of lawyer advertising.