LEXIS-NEXIS® Congressional Universe-Document
LEXIS-NEXIS® Congressional
Copyright 1999
Federal News Service, Inc.
Federal News Service
MARCH 16, 1999, TUESDAY
SECTION: IN THE NEWS
LENGTH: 598 words
HEADLINE: PREPARED TESTIMONY OF
RALPH R. MABEY
BEFORE THE
HOUSE JUDICIARY COMMITTEE
COMMERCIAL AND ADMINISTRATIVE LAW SUBCOMMITTEE
SUBJECT - RESPECTING PROPOSED
BANKRUPTCY REFORM
BODY:
For two centuries, American
bankruptcy law has evolved toward unconditional discharge while it promotes the fair
distribution of assets for creditors. The fresh start provided for honest
debtors by American
bankruptcy law is quite consistent with our relatively free market economy that imposes
relatively great risks (and opportunities) on our citizens and provides
relatively meager safety nets.
Consumer debt, not the
Bankruptcy Code, is responsible for the increase in filings
Most economists and researchers have rejected the theory that the
Bankruptcy Reform Act of 1978 is responsible for the subsequent increase in the
bankruptcy filing rate. Indeed, the 1984 amendments, which restricted debtors' access and
rights in
bankruptcy, was also followed by a sharp increase in the filing rate.
The rise in
bankruptcy filings from the 1920s until 1985 is best explained by the rise in consumer
debt. Since 1985, the increase in
bankruptcies may be attributable to the growing distribution of consumer credit to lower
income borrowers, who ultimately are more likely to default. According to the
Federal Reserve, in 1983, the bottom 45% of American households (as measured by
income) carried only 42% of all consumer debt; by 1992, the bottom 36% of
American households carried 56% of all consumer debt. The functional
deregulation of interest rates, along with the general lowering of prime
interest rates, may explain the increase in poorer Americans' access to credit
since the mid-1980s.
The stigma of
bankruptcy: reports of its death have been greatly exaggerated
Death of stigma arguments are not new. Thomas D. Thacher, Soliciter General of
the United
States, suggested in 1930 that
bankruptcy was losing, or had already lost, its stigma. If
bankruptcy has lost its stigma, we would expect that people filing for
bankruptcy today would have higher incomes and lower debts than those who had filed in
the past. However, Americans who file for
bankruptcy in the 1990s actually have lower incomes and higher debts than those who filed
for
bankruptcy in the early 1980s.
If any stigma has died, it is the stigma of indebtedness
Borrowers (and lenders) embrace consumer debt much more than they should.
Perhaps education, reinstitution of usury laws, or increased disclosures in
connection with consumer credit will curb such tendencies, but the proposed
bankruptcy reform will not. Instead, tightening kruptcy laws as proposed (e.g., making more
credit card debt nondischargeable) may make consumer lending even more
profitable thereby increasing incentives to expand lending to
low income, subprime and riskyers, perhaps leading to even more defaults.
Discretionary dismissal, not means testing
If consumer debt, and its distribution among low income borrowers, is driving
up the
bankruptcy filing rate, means testing is not the solution. Instead of implementing a
potentially arbitrary means testing system, at considerable expense, increasing
court discretion and oversight may be a more appropriate and efficient measure
to identify and dispense with the relatively small proportion of abusive cases.
Protecting creditor benefits in
bankruptcy, business and consumer
Today,
bankruptcy protects creditors from the
"snatch and grab" laws of each state, which otherwise require that creditors fight each other
over the debtor's remains to their mutual disadvantage, destroying asset
values. Special interests seeking individual benefits in
bankruptcy undermine the equity and equilibrium of
bankruptcy and the success of the
reorganization process.
END
LOAD-DATE: March 20, 1999