Consumers across the country should be prepared for a broad attack on laws that affect personal bankruptcy.
This is one of the few clear messages from last week's convention of the American Bankers Association. In an industry divided sharply over such fundamental issues as interstate banking and savings and loan association powers, a common enemy has been perceived that brings bankers together: federal bankruptcy laws that were liberalized late in 1979.
In essence, the contention of bankers, retailers and other lenders is that the American people are headed into court in record numbers to file personal bankruptcy petitions, so they can avoid debts which would be paid if the laws had not been changed.
Although the new law has been on the books just two years, the banking industry has joined forces with finance companies, automobile dealers, credit unions, credit bureaus and retail firms to form the National Coalition for Bankruptcy Reform, with a goal of "reforming" in their favor what also was called a "reform" of the law when Congress acted in 1978.
To provide necessary statistics that always are required when one sector wants to convince government of a need to change the laws, the business group commissioned a research study. Opinion Research Corp. and the Arthur D. Little company designed a method for collecting data, developed a sample and collected the information. Purdue University's Credit Research Center added further credibility by designing a questionnaire and analyzing the results. The cost to the bankers and other businesses for this report was $300,000.
Last week, in Washington and by telecommunications link to the bankers' convention, Purdue released details of the report at a news conference staged by New York public relations consultants. o far, there is nothing wrong with all of this. In fact, the study offered little information that common sense wouldn't validate. The problem is that the businesses which sponsored the study now plan to use and abuse the data in an effort to convince Americans that it's time to abandon a bankruptcy liberalization even if there has been no adequate period of normal economic life to test the changes, which allowed individuals to exempt from their assets certain personal items of property.
Three days after the study was made public, for example, a public relations executive mailed a letter to this newspaper on behalf of a consumer finance client. "The federal bankruptcy code that went into effect in October 1979 has become a real nightmare to the nation's lenders. A study, just released, confirms what has been feared from the start: that the code would turn Americans into a nation seemingly bent on using the bankruptcy court as the quickest and easiest escape route from debt," stated the letter, which suggested an interview with a corporate officer on "how and why the code should be changed so that those borrowers who can afford to pay their debt -- do."
And Bank of America Executive Vice President Kenneth Larkin told reporters here that the study "means we now have some very good evidence to ask for tangible reforms in federal bankruptcy laws."
National Consumer Finance Association President Walter Kurth added: "The study lays to rest the idea that inflation and unemployment are the only causes of the sharp rise in bankruptcies."
The difficulty in accepting all of these responses to the study is that they appear to have been conclusions reached before the study was made. In truth, the study had no such findings. To his credit, Purdue Credit Research Center director Robert Johnson did not take sides and said he would hesitate to conclude that bankruptcy laws permit widespread abuses.
Since an effort is being made to portray the study in a different light, it is important to spell out what it found. In calendar year 1980, personal bankruptcies totaled 409,000 compared with 228,000 in 1979. The projection for 1981 is 460,000 individual filings, covering $6 billion of non-mortgage and non-business debts that will be discharged through new personal bankruptcy provisions.
Based on personal interviews with 1,199 debtors, the study also found that four out of ten persons who filed a new Chapter 7 personal bankruptcy could afford to pay 50 percent or more of their non-mortgage debts over five years. And 29 percent of the individuals, with average non-mortgage debts of $10,500, could have repaid 100 percent of debts over five years. These payments are presumed possible, based on an assumption that the individuals would continue to work.
Overall, the study concluded that debtors who declare bankruptcy in 1981 could pay back more than $1.5 billion of their debts and that costs of these non-payments are passed on to other borrowers in the form of higher charges.
So, there has been a sharp increase in personal bankruptcies and many more individuals are doing what corporations long have done by getting rid of some past debts.
Missing in these statistics and in all of the reaction to the report, however, is any perspective about what has been happening in the economy. Is it because of a liberalized law (about which few persons are knowledgeable) that individuals are filing bankruptcy petitions in large numbers, or is it because this country has been under a siege of record high interest rates that happened to coincide with the effective date of the new law? In addition, there is some evidence that creditors can get paid a larger percentage of what is owed them if they work with the debtors and courts.
Not everyone agrees that the increase in personal bankruptcies reflects consumers callously taking advantage of the law. Federal Bankruptcy Judge Ralph H. Kelley of the Eastern District of Tennessee in Chattanooga, for example, told Washington Post staff writer Martha M. Hamilton last week that: "Nine out of 10 people who come into my court come in because they're about to have a car repossessed or are in some other economic distress."
"The law is getting a bad rap because it occurred at the time of an economic downturn," he said. Rather than taking advantage of the more liberal exemptions provided for in the revised code, many people who file claim less than they are entitled to. "I've got 3,000 new cases in my court, and if you were to see what property people claim as exempt -- they don't even use up what state law allows, much less what the federal law allows," said Kelley, a former mayor of Chattanooga.
"Very few are cool, cold, calculating people, though there are some," he said. "The truth is, the only ones who would use up the exemptions are rich Republicans who have had business failures and who have personally guaranteed all the business' loans," he said. One such creditor came into his court and claimed items including a silver service and expensive china that creditors might otherwise take in lieu of repayment. "He could have used some more exemptions, but the guy who works in a factory is not going to have thousands of dollars worth of assets to claim."
Kelley made two major points in a conversation with reporter Hamilton. The law has been good for some creditors, he noted. Chapter 13 has provided for more repayment of debt under the new code and the amount continues to rise, he said. From fiscal 1980 to fiscal 1981 repayment of creditors increased 60 percent in his court, he noted. "Creditors are getting a barrel of money under Chapter 13."
He also pointed out that business bankruptcies have increased in number. "The law was not designed to make it easier for businesses to file," he pointed out. "They're just hard, hard times." A survey by Washington Business last summer showed, for example, that total business bankruptcies in metropolitan Washington jumped 28 percent in the first four months of 1981 compared with last year. And Chapter 11 business bankruptcies, where a firm seeks to reorder its debts but stay in business, soared 80 percent in the D.C. area.
Not one part of the bankruptcy law changes that took effect in 1979 made it any easier for businesses to file bankruptcies and avoid debts. The fact that sharp increases in both business and personal bankruptcies have taken place over the same period points to interest rates, the cost of debts and the economy as the prime factors, and not to any changes in the law.
In the Purdue study, individuals were asked what were the important factors in their bankruptcy filings. The three top answers were: "cost of living went up," "bought too much on credit," and "medical bills."
Perhaps A. Thomas Small, vice president of First Union National Bank in Raleigh, N.C., had a better perspective than some in his business about this issue. "An unbending approach to loan collection will have the effect of forcing individuals into bankruptcy," he told an ABA session here. "If a lender can extend payments and take additional security for the indebtedness, both the debtor and the creditor will benefit."
There can be little doubt that personal bankruptcies would be fewer if lenders and creditors had been more cautious in the past about lending and selling on credit. Given the inflationary era of the late 1970s, many such credit mistakes were made by businesses. Now that these mistakes are recognized as such, Small's approach of working with clients seems to hold the most promise.
Maybe a $300,000 research study on how businesses can help their customers work their way out of debt is in order?