Creditors anxious to plug 'loophole' in bankruptcy law
Here on the 16th floor of Chicago's federal court building the talk - all day , every day - is of rising expenses and overdue payments on stereo sets, cars, furniture, and even exercise bikes.
US Bankruptcy Court is in session, and the dockets are crowded - as they are everywhere in the country these days. One young man, overwhelmed by car payments he cannot meet, says his uninsured car was stolen and he has no choice but bankruptcy. For most, the details have been carefully worked out in advance with lawyers. The judges dispose of the cases routinely and quickly.
The problem with all this, as the nation's creditors see it, is that personal bankruptcies have suddenly become too easy an ''out'' for those facing a financial crunch. Bankruptcy filings have taken a giant leap forward over the last two years. The 1980 total - 409,798 - was almost twice that of 1979. Predictions are that this year's sum will soar even higher.
Certainly inflation and recession in a worsening economy have played a role. Mortgage delinquencies, for instance, are now at what experts describe as serious levels. But a large and diverse group of creditors - from banks and retailers to auto dealers and finance companies - feel they have isolated another key cause in addition to general economic conditions. And they're determined to remedy it.
A loophole in Chapter 7 of the amended 1978 US Bankruptcy Reform Act, they say, considers the debtor's assets but fails to take into account his current or future income in determining eligibility to declare bankruptcy. By contrast, income has long been a key factor in the creditor's decision of how much credit to grant.
The National Coalition for Bankruptcy Reform, an informal group of 285 creditors, is pushing hard for a change in the law. A bill to their liking, requiring that income be taken into account in determining an individual's eligibility for bankruptcy, has been introduced in the House by Rep. Billy Lee Evans (D) of Georgia. A Senate subcommittee will begin hearings on the issue Oct. 29.
So far there is little organized opposition to the proposed reform. The main roadblock, creditors say, is that the 1978 law, which included a number of major improvements and was five years in the drafting, has only been in effect for a slim two years.
''Nobody wants to gut the whole law - it has a lot of good protection for the consumer in it,'' stresses Peter Gray, who is in charge of legislative management for Citibank, one of the members of the creditor group. ''We're only after those who clearly can afford to repay.''
Technically, under the present law, anyone with piled-up debts could quit his job to keep his income from being considered in a bankruptcy proceeding. The classic case cited by officials of Beneficial Finance, one of the two largest consumer finance companies, is that of a West Coast husband and wife who owned an expensive house and earned more than $100,000 each as medical doctors. In carefully planned sequence, they quit their jobs, went bankrupt, and moved to a new location where they promptly assumed new jobs at the same salary. Most creditors think such job juggling would be unlikely under the proposed new rules.
Two major recent studies are fueling the push for a change in the law. The newest, a 1981 survey of 1,199 bankruptcy cases by Purdue University funded by the umbrella creditor group, confirms that the majority of those filing for bankruptcy do so out of a compelling need. But researchers also found that, after allowing for normal living expenses, almost 40 percent of those filing under Chapter 7 could have repaid at least half of their nonmortgage debt within five years. The study, which confirmed that three-fourths of those trying to wipe out their debts had full-time jobs, noted that 20 percent of those filing could have paid off all their debts in three years.
''It isn't just the truly needy who are filing for bankruptcy,'' observes Dr. Richard L. Peterson of Purdue, who helped analyze the results of the study. ''A lot of people who probably could have repaid just didn't want to pull in their belts.''
An earlier study for four consumer finance companies focusing on 1980 data came up with roughly similar findings. Former Federal Reserve Board member Andrew Brimmer, head of Brimmer and Company Inc., which conducted the study, suggested that some 40 percent of the bankruptcies studied sprang not from economic conditions but from the more liberal eligibility rules in the 1978 law. He found that the average bankruptcy applicant had had two years of college and was earning $10,000 to $25,000. The study found that generally the economic status of those taking the partial repayment route of Chapter 13 of the bankruptcy law vs. those opting to rid themselves of most all dollar obligations under Chapter 7 was about the same.
Creditors clearly are intent on reining in the minority of filers who choose bankruptcy more out of convenience than necessity. Credit bureaus, whose members include credit grantors, are taking the lead in developing a national advertising campaign to alert debtors to bankruptcy's consequences and to prod them to consider other alternatives. The credit bureau in Peoria, Ill., for example, has developed and run in recent weeks a series of three TV commercials that stresses the cost to all of bankruptcy and the option of talking things over with the credit grantor (who often is eager to work out a time payment plan) or a credit counseling service. The first ad in the series notes that while it is sometimes possible to keep one's house, car, and furniture while going bankrupt, the action remains on the record for 10 years and can make future purchases difficult, if not impossible.
In nearby Rockford, Ill., where personal bankruptcies have almost quadrupled over the last four years and often for such small debts as $2,000, credit bureau president Lee Volmer says his agency has borrowed the commercials from Peoria and is in the midst of raising funds from local businesses to air them over the next four months.
''It's usually right after Christmas when the bills pour in that people start to feel the crunch,'' he observes. ''A lot of the problem boils down to a need for budgeting help. You'd be surprised at how many people just don't know how to run a budget.''
Judge Thomas James who has presided over bankruptcy cases for the last decade here in Chicago blames inflation for many financial management problems.