ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Sunday, December 29, 1996 TAG: 9612310062
SECTION: EDITORIAL PAGE: 3 EDITION: METRO
SOURCE: RICHARD E. WAGNER
OVER THE past 10 years, filings for bankruptcy have tripled in the United States. Annual bankruptcy filings held steady at about 300,000 during the early 1980s, but have grown sharply since 1985. A number of experts project that we will have passed the 1 million mark this year.
Where 1.2 bankruptcies were filed in 1985 for every 1,000 citizens, 3.3 bankruptcies were filed in 1995. In Virginia, that rate was 4.1.
Bankruptcy filings now occur eight times as frequently as during the depth of the Great Depression of the 1930s. This rise in bankruptcy cannot be attributed to lousy economic conditions.
While economic growth has been slow, no one claims that we face anything like a depression. Unemployment is low, and people can find jobs when they look.
True, corporate downsizing is much in the news these days. But these readjustments do not add up to anything like a depression or recession. Indeed, many observers now speculate that our economy is close to depression-proof.
Our current spate of bankruptcies in the absence of any economic depression is troubling. Bankruptcy does not just concern the debtors and creditors involved. It concerns all of us. It is a tax that we all pay.
As bankruptcies increase, the cost of doing business increases. This leads to increases in the cost of credit to everyone. The higher the amount of bankruptcy, the higher the so-called bankruptcy "tax" that everyone pays. One estimate places this tax toll at $300 per year per American family.
This is not to say that bankruptcy should be abolished. The day when we sent debtors to prison is long behind us. Sometimes, people become insolvent through unforeseeable changes in circumstance. A modest amount of bankruptcy is a reasonable price to pay, as insurance against being victimized by strongly unfavorable changes in circumstances that we could not have foreseen.
Indeed, this is the classic use of bankruptcy. It is a last resort to escape insolvency when the debtor can no longer hope to repay his debts through reasonable effort. In some cases, it is better to erase debts so people can participate once again in our economic life.
What has been happening, however, is that bankruptcy is coming increasingly to be used as a first response to insolvency. When insolvency starts to tighten, the struggle for solvency is abandoned and bankruptcy declared.
Under Chapter 7 of our bankruptcy code, virtually all debts can be discharged through bankruptcy. While about 70 percent of all bankruptcy filings fall under Chapter 7, the remaining 30 percent take place under Chapter 13. Chapter 13 requires the debtor to repay a portion of the debt before the remaining debt is discharged.
Chapter 13 is more in tune with the classic approach to bankruptcy, whereas Chapter 7 allows bankruptcy to be a relatively painless way of erasing debt obligations. Someone who files under Chapter 13 actually pays part of his debts, whereas the user of Chapter 7 pays none (save for exclusions for such things as child support). More than this, the credit record of someone who files under Chapter 13 is blighted for a longer period than that of someone who uses Chapter 7. It is understandable why one bankruptcy expert has called Chapter 13 the "chump chapter."
Some people blame the increasing availability of credit cards as the reason for the growth in bankruptcy, often calling in the process for restrictions on credit cards as a way of curbing insolvency and bankruptcy. The evidence, however, shows clearly that credit cards are not to blame. Bank credit-card debt is just 7 percent of total consumer debt.
The heavy use of Chapter 7 is largely a result of its easy availability. Too much of a good thing can be bad, and that is what has happened with bankruptcy. It has become an option of first response, but it needs once again to become an option of last resort. Otherwise, the bankruptcy tax on the economy will continue to rise.
In 1994, Congress created the National Bankruptcy Review Commission to examine issues relating to our bankruptcy code and to recommend revisions to that code. Its report is due in October 1997, and we can hope that it will throw its weight behind a reduction in our growing bankruptcy tax.
In one fashion or another, this will require a shift in bankruptcy proceedings away from the principles of Chapter 7 toward those of Chapter 13.
Richard E. Wagner is a professor of economics at the Center for Study of Public Choice at George Mason University in Fairfax.
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