LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

MARCH 17, 1999, WEDNESDAY

SECTION: IN THE NEWS

LENGTH: 5399 words

HEADLINE: PREPARED STATEMENT OF
PROFESSOR TODD J. ZYWICKI
GEORGE MASON UNIVERSITY SCHOOL OF LAW
BEFORE THE HOUSE JUDICIARY COMMITTEE
COMMERCIAL AND ADMINISTRATIVE LAW SUBCOMMITTEE
SUBJECT - THE BANKRUPTCY REFORM ACT OF 1999

BODY:

It is a pleasure and an honor to testify before this Subcommittee today on the topic of Perspectives on Consumer Bankruptcy Reform. I have practiced, taught, and published articles on the subject of consumer bankruptcy. Most recently I am a co-author with Judge Edith H. Jones of the forthcoming article, "It's Time for Means-Testing," which will be published in the B.Y.U. Law Review, a copy of which Judge Jones and I have previously inserted into the record of the Hearings on the Bankruptcy Reform Act of 1999. I am also the author of a working paper on "Credit Cards in Bankruptcy."
The current state of the consumer bankruptcy system has been well- documented. Year after year, consumer bankruptcy filing rates spiral upward at record rates to reach all time highs, even as unemployment, interest rates, inflation, and business bankruptcies plunge downward to record lows. The need for consumer bankruptcy reform is pressing. The Bankruptcy Reform Act of 1999 (the "Act") is a strong step in the right direction.
The central provision of the Act as it relates to consumer bankruptcy is the creation of a "means-test" for high-income debtors. As I noted in my prior testimony, see Statement of Todd J. Zywicki, March 11, 1999, the debate over means-testing boils down to a simple question: Should high-income debtors, who can repay a substantial portion of their debts without significant financial or other hardship, be required to do so?
Clearly, the answer to this question is "yes," for the reasons I have previously stated. To summarize, means-testing would have no impact whatsoever on poor individuals and families. It would have no impact on those suffering chronic health problems that prevent them from maintaining a steady job. In short, it would have no impact at all on those who need bankruptcy the most: the poor, unemployed, and unfortunate debtors who comprise the bulk of the bankruptcy system. Thus, claims that "means-testing is mean-spirited," not only are unfounded, but appear to lack an understanding of the means-testing provisions contained in the Act.
Although means-testing leaves low-income debtors unaffected, it identifies a discrete and well-defined class of high-income debtors who have the ability to repay a substantial portion of their debts without significant financial or other hardship. Estimates vary, but it appears that only 10% or less of bankruptcy filers would be subject to means-testing. But because means-testing targets high-income debtors with a substantial ability to repay, those debtors could repay 60%-70% of their debts, which amounts to a total of over $4 billion. Thus, even if adopting means-testing would increase administrative costs (an erroneous conclusion, as will be discussed in a moment), it would do so only by $100-$200 million a figure that is dwarfed by the financial recoveries enabled by means-testing. Establishing a statutory means-testing role also would bring needed uniformity, predictability, fairness, and confidence to the consumer bankruptcy system. Finally, means-testing would send the crucial moral signal that bankruptcy is a serious matter, and should not be used simply to abandon promises that one has the capacity to keep and debts that one has the ability to repay.
The current system of policing abuse under Paragraph 707(b)'s "substantial abuse" provision has spawned a cottage industry in trying to articulate coherent, consistent, and fair standards for enforcing this maddeningly vague command. This has led to very high rates of litigation and unpredictability. The confusion of trying to interpret current Paragraph 707(b) is summarized in the case of In re Attanasio, 218 B.R. 180 (Bankr. N.D. Alabama 1998). In that case, Judge Cohen discusses literally hundreds of different cases interpreting Paragraph 707(b), all of which apply different legal rules and weigh the facts differently. Surveyed cases seem to run from finding substantial abuse when a debtor has the ability to repay 17% of their unsecured debts over a period of 36 months in one case, to 19% over 36 months or 31.7% over 60 months, to cases requiring 54%, or 90%, or 100%. There is no agreement as to how much the debtor has to have the ability to pay, nor is there any guidance as to whether the relevant period of examination is 36, 48, or 60 months. And all this confusion is just over drawing the line as to how much the debtor must be able to repay to constitute substantial abuse. Similar confusion reigns over what level of income the debtor must have to have the ability to repay. On this point, Judge Cohen surveys roughly 200 or 300 more cases that run from as much as $19,000 per month in income down to $500 per month. From there, the case goes on page after page, case after case, discussing the standards, factors, and weightings that various courts have engaged in to determine whether there is substantial abuse in any given case. And, of course, often these decisions are not final, as appeals to the district court and beyond often will follow.
In contrast to the current system, the means-testing provisions supplied by the Act will streamline the system and limit the issues in a given case to a narrow and discrete inquiry. The bottom 80% of cases will not even be impacted by means-testing, as they will not even meet the minimum income threshold. Similarly, the very top income earners will almost certainly be impacted by means-testing, so there will be little litigation in those cases. Indeed, many of those who can repay all or almost all of their debts will simply choose to forgo bankruptcy altogether, thereby removing those cases from the system completely. Unlike the wide-ranging legal and factual inquiry required by the current system, as exemplified by the Attanasio case, means- testing will focus inquiry on a relatively small group of cases who will be borderline candidates, as most filers will be clearly affected or clearly unaffected. And for this borderline group, the inquiry will be far more narrowly and specifically tailored than under the current regime. Thus, litigation should go down under means-testing, not up. Decisions will be more predictable and uniform. And not only will the actual fairness of the consumer bankruptcy system be enhanced, but so will the perception of fairness in the eyes of the public, leading to increased confidence in the consumer bankruptcy system.
Finally, the costs of bankruptcy reform must be weighed against the costs associated with not reforming the bankruptcy system. If current trends continue, bankruptcy filing rates will continue to escalate. This will lead to a need for more judges, more trustees, and more administrative costs for everyone. Thus, to the extent that bankruptcy reform slows filing rates, it will be an improvement over the trends predicted if bankruptcy reform is abandoned.It is also misguided to point to evidence of the high failure rate for Chapter 13 cases to undercut means-testing. Standing alone, Chapter 13 failure rates are inapposite to the debate over means-testing, as they reflect numerous factors that have little relevance to the current debate. First, a huge number of Chapter 13 cases are filed not because the debtor expects or desires to maximize the payout to her creditors, but to stay a mortgage foreclosure and to pay off any arrearages. Once that task is completed, the case is often converted to Chapter 7, but it goes in the books as a Chapter 13 "failure." See In re Kornfield, 211 B.R. at 475. Second, many debtors simply should not be in Chapter 13 in the first place, in that they lack sufficiently regular income- earning patterns to make it feasible for them to complete a Chapter 13 plan. These debtors file Chapter 13 for a variety of reasons, including a desire to gain its superdischarge, overoptimism about the ability to complete a plan, or mistake.

Of course, those impacted by means-testing will by definition be upper-income individuals with regular earnings, hence they should have much higher success rates than the typical Chapter 13 case. Thus, one should not be misled by the general failure rate of Chapter 13 cases into thinking that this may be an accurate prediction of the likely result of the group of Chapter 13 cases created by means-testing.
Understanding the Bankruptcy Boom
As a nation of entrepreneurs, risk-takers, and immigrants looking for a fresh start on life, the United States has long had a history of generous and forgiving bankruptcy laws. To this day, our bankruptcy laws are among the most forgiving in the world. But the availability of generous and forgiving bankruptcy laws was always counterbalanced by a strong ethic of personal responsibility and respect for promises and contracts. This traditional attitude was personified by Harry Truman, who was confronted by large debts arising from the failure of his Kansas City haberdashery during the 1921 recession that rocked the agricultural Midwest. Rather than file bankruptcy, Truman vowed to pay off his debts. As David McCullough wrote in his biography of Truman, "Fifteen years after the store went under, Harry would still be paying off on the haberdashery, and as a consequence would be strapped for money for twenty years." But he did, even after his partner filed bankruptcy himself.
Perhaps the modem view is best personified by Dr. Robert N. Kornfield. See In re Kornfield, 164 F.3d 778 (2d Cir. 1999). Dr. Kornfield is a gastroenterologist in New York who earned $472,445 in 1994, and $404,593 in 1995, before his income "plummeted" to a "mere" $318,217 in 1996 (his original schedules indicated an income of $276,000, but this apparently was revised upward during the bankruptcy case). He also had an additional amount of $390,216 in various pension or profit-sharing plans. Finding this pittance of $318,000 impossible to live on, Dr. Kornfield filed bankruptcy. And well he might: How else could he be expected to meet his lease payments on his new Landrover Rangerover (one of three cars the family owned or leased), his annualized living expenses of $157,380 per year (including $1,200 per month for food), the $507,000 he owed on his mortgages on a foreclosure of his $2.5 million house, and his obligations of $53,640 per year to send his children to the most prestigious and expensive private high school in the area? In re Kornfield, 211 B.R. 468 (Bankr. W.D.N.Y. 1997). As Bankruptcy Judge John C. Ninfo, II, concluded in his Bankruptcy Court opinion, "The Kornfields appear unwilling to make any effort to reduce their.., voluntary and excessive living expenses to enable them to pay something to their creditors." Id. at 482.
How did we get from Harry Truman to Robert Kornfield in just a few generations? Available evidence suggests two overriding factors that explain the bankruptcy boom of recent years. First, is an increase in the economic benefits of filing bankruptcy and a contemporaneous drop in the economic costs associated with filing bankruptcy. Second, is a general decline in the personal shame and social stigma associated with filing bankruptcy.
The economic benefits of filing bankruptcy are potentially large, and they get larger as one's income and wealth rise. The most notable advantage of filing Chapter 7 bankruptcy is the ability to retain property in "exempt" property while walking away from obligations owed to creditors. Economist Michelle White of the University of Michigan has found that bankruptcy filing rates are, to some degree, positively related to the generosity of exemptions. Overall, White has found that at least 15% of households would benefit financially from filing bankruptcy, and that number rises if they plan strategically for bankruptcy, such as by convening nonexempt assets to exempts assets prior to filing. See Michelle J. White, "Why Don't More Households File for Bankruptcy?" 14 Journal of Law, Economics, and Organization 105 (1998); Michelle J. White, "Why it Pays to File for Bankruptcy: A Critical Look at the Incentives Under U.S. Personal Bankruptcy Law and a Proposal for Change," 65 University of Chicago Law Review 685 (1998). Thus, not only did filing rates rise after the doubling in the value of federal exemptions in 1994, but she further estimates that adopting the National Bankruptcy Review Commission's recommendation for a uniform federal level of exemptions would lead to an overall increase in bankruptcy filings of 89,000 per year. Moreover, because exemptions tend to protect certain types of property such as houses, cars, and the like, they are disproportionately favorable to upper- income earners who have the ability to funnel money into these particular types of exempt properties and maximize the value of the exemptions.
There are also substantial other economic benefits associated with filing bankruptcy, such as the automatic stay, the stopping of the running of interest on unsecured debts, and, of course, the discharge of debts at the end of the process. Finally, there are substantial noneconomic benefits of filing bankruptcy, such as peace from one's creditors as they cease collection efforts.
At the same time that the benefits of filing bankruptcy have risen, the costs associated with filing bankruptcy have fallen. Most notably, the passage of the Bankruptcy Code in 1978 ushered in an era of more generous bankruptcy relief. Thus, several studies have shown a significant increase in the bankruptcy filing rate following the enactment of the 1978 Code.
Perhaps the greatest cost associated with filing bankruptcy is merely finding out about it as a viable option, or what economists call "search costs." The search costs of filing bankruptcy have fallen substantially in recent years. The rise of attorney advertising in the 1980s reduced the information costs to debtors of learning about bankruptcy as an option.The sheer number of bankruptcy filings and the publicity it has garnered has also raised public awareness of the bankruptcy system. An increasing number of bankruptcies are the result of the "water cooler" effect: people learning about bankruptcy from family members, friends, or co-workers, who report that it was cheap, easy, and put an end to creditors' collection efforts. Finally, the repeated vision of well-known entertainers, politicians, and others using the bankruptcy system has provided substantial "free advertising" for the system.
Not only have the search costs of learning about bankruptcy fallen, but the direct costs of filing have fallen as well. The large number of bankruptcy filings has engendered certain economies of scale that have reduced the out-of-pocket costs of filing bankruptcies. Thus, "do-it-yourself" bankruptcy books have become a staple of bookstores and even grocery store check-out lines. The creation of so-called bankruptcy "mills" has reduced the costs of obtaining an attorney for the typical high-volume, low-difficulty Chapter 7 case. Using teams of paralegals and secretaries, these attorneys represent thousands of debtors per year, mass-producing cheap Chapter 7 petitions at record speeds.
This increase in the benefits of filing bankruptcy and decrease in the costs has been reinforced by a striking reduction in the personal shame and social stigma traditionally attached to the decision to file bankruptcy. Bankruptcy is a moral act, as well as a legal and economic act. It is a decision to repudiate one's promises, a decision not to reciprocate a benefit bestowed upon you by another. We teach our children from a very young age to keep one's promises because it is the right thing to do. Thus, it is not surprising that people traditionally have felt shame from breaking one's promises and' that repudiating them in public through the bankruptcy system generally has been met with social disapproval. Harry Truman repaid his debts because he thought it was the right thing to do and to protect his good name. In today's world, it is hard to imagine either of these factors really constraining someone in Truman's position. To paraphrase Senator Moynihan, we have "defined bankruptcy deviancy downward" to the point where it has become a routine financial planning device rather than a option of last resort.
The conclusion that a decline in the shame and stigma associated with filing bankruptcy is responsible for the recent explosion in filing rates has been borne out in several recent studies. See F.H. Buckley & Margaret F. Brining, "The Bankruptcy Puzzle," 27 Journal of Legal Studies 187 (1998); Scott Fay et al., "The Bankruptcy Decision: Does Stigma Matter?" (working paper, University of Michigan Department of Economics 1998); David B. Gross & Nicholas S. Souleles, "Explaining the Increase in Bankruptcy and Delinquency: Stigma versus Risk- Composition" (working paper, Wharton School of Business, University of Pennsylvania 1998); Visa, U.S.A., Inc., "Consumer Bankruptcy: Causes and Implications" (1996). The findings of these studies is consistent with those of casual empiricism. For instance, credit unions report that nondelinquent borrowers are filing bankruptcy at an increasing rate, with no prior effort to work out any consensual repayment plan. The increasing number of these "surprise" bankruptcies suggests that bankruptcy more and more is looked at as an option of first, rather than last resort.The decline in the traditional shame and stigma associated with filing bankruptcy has had its largest impact on higher-income filers. As previously noted, the financial benefits of filing Chapter 7 are potentially greatest for higher-income filers, who generally have a greater ability to shield assets in bankruptcy and to manipulate the system for their benefit through savvy bankruptcy planning.

As a result, the residual sense of shame and stigma attached to filing bankruptcy have had their greatest impact on restraining opportunistic filers by these individuals. As shame and stigma decline, therefore, the marginal impact will be felt most heavily with respect to upper-income debtors. This suggests that, absent reform, we will continue to see an ever-increasing number of high-income bankruptcy filers. Thus, not only is means-testing the right idea today, but it will become increasingly necessary in the future, as a means to counteract these underlying trends.
Beware Misleading Statistics
But in looking to past for lessons about bankruptcy reform, one must be careful. In particular, one must be wary of academic and other witch-doctors boiling-up a stew of misleading and irrelevant statistics designed to derail sensible and needed bankruptcy reform.
The most prominent of statistic that is trotted out to explain rising bankruptcy filing rates is a purported "correlation" between consumer debt and bankruptcy filing rates. Even if true, the simple and obvious to this is, of course, "so what?" Correlation does not equate to causation. I am aware of no studies that actually demonstrate a causal link between overall consumer debt levels and bankruptcy filing rates. Yet some scholars and commentators insist on drawing causal links from the crudest evidence of correlation. See, e.g., Elizabeth Warren, "The Bankruptcy Crisis," 73 Indiana Law Journal 1079, 1081 (1998) ("The macrodata are unambiguous about the best predictor for consumer bankruptcy. Consumer bankruptcy filings rise and fall with the levels of consumer debt." (emphasis added)); see also id. at 1083 ("(Various studies) all demonstrate the correlation between rising levels of consumer debt and rising bankruptcy rates. The simple explanation of the rise in filings - bankruptcies rise as household debt rises - is undeniable.").
This argument is implausible on its face. Overall debt levels simply cannot provide an explanation for the rapid ran-up in bankruptcy filing rates in recent years. As one commentator has observed, even if debt-to-income ratios have worsened, they have done so gradually: "They did not get worse by 29% in 1996 over 1995, but bankruptcies did. They did not worsen again by 20% in 1997 over 1996, but bankruptcies did."
Moreover, the advocates of this thesis have failed to provide a persuasive explanation as to how debt could "cause" bankruptcy for individuals. More relevant, would be the current debt burden, the amount that debtors are obligated to pay each month on their various loans. The ability to meet one's obligations as they come due would certainly seem to be the more logical way of thinking about debt and individual bankruptcy than some sort of balance sheet test. Because of the low interest rates of recent years, current debt burdens have fallen even as overall debt levels have risen and remain below their all-time high. As a result of these low interest rates, borrowers should be able to carry the same or even greater debtlevels with greater ease than before.
Pointing to "debt" as the source of consumer bankruptcy also ignores the fact that the amount of debt that consumers are willing to incur will be a function of the ease with which they can file bankruptcy and later discharge those debts. Hence, the debt level cannot be an exogenous variable that could "cause" bankruptcies because the overall debt level itself is, at least in part, caused by the bankruptcy law itself. If you reduce the "cost" of debt by making it easier to discharge, then you will get more of it. Nor does debt exist in a vacuum. It accumulates through conscious decisions to purchase goods and services. Thus, "too much debt" in many cases could be recharacterized as "too much spending," as was the case with Dr. Kornfield. It is not debt that causes bankruptcy for many people, it is a conscious choice to maintain an extravagant and unrealistic lifestyle rather than tightening one's belt and spending responsibly.
It also will not do to blame credit card issuers. Because of their visibility, credit card issuers have become easy villains for those seeking to blame creditors. As Judge Jones and I wrote, "(C)redit card issuers have become the modem equivalent to William Jennings Bryan's 'Cross of Gold,' crucifying consumers in the pursuit of ever-greater profits." But blaming credit card issuers for the bankruptcy boom is implausible. First, the total credit card debt burden of $529 billion pales in comparison to overall housing debt of $4 trillion, and housing debt has been increasing much faster than revolving debt in recent years. Second, most Americans are "convenience" users of credit cards who pay off their balances each month and therefore accrue no interest fees or service charges. Focusing on those who revolve balances from month-to-month ignores the reality that few Americans fit this profile.
Those who would vilify credit card issuers also misunderstand the role that credit cards play in the modem American economy. Entire segments of our economy, such as internet and catalogue shopping, would not exist without consumer access to credit cards. They have aided in the growth of millions of new businesses by reducing their risk of loss from nonpayment of accounts and by enabling them to compete with Sears and other big retailers who used to dominate the retail credit market. Credit cards enable individuals to deal with short-term emergencies like car and home repairs, without having to hoard large amounts of cash in non-interest beating checking accounts, not to mention all the fringe benefits of frequent flyer miles, rental car insurance, purchase price protection, and even cash back bonuses. Moreover, the credit card industry has revealed itself to be ferociously competitive. In a market with 6,000 issuers and millions of consumers it is hard to imagine it being otherwise. And, indeed, after an early period of high profitability following deregulation, profits on credit card issuers have decreased substantially in recent years. Critics continue to sound warnings about the "credit card menace" without realizing that the credit card Cold War is over and it is the consumers who have won.
Despite this, criticisms of the credit card industry persist. Much of the criticism is grounded in factual errors. For instance, many critics rely on a study by economist Lawrence Ausubel that purports to persistent supranormal returns to credit card issuers, pointing to alleged "stickiness" in credit card interest rates as evidence. Scholars have pointed outnumerous flaws in Ausubel's methodology and conclusions, many of which are discussed in Edith H. Jones and Todd J. Zywicki, "It's Time for Means-Testing," 1999 BYU Law Review (Forthcoming 1999). Among the errors that have been identified are a failure to account for the higher transaction costs and risk associated with credit cards, his huge overestimation of the number of consumers who revolve balances from month to month, arbitrariness in the financial institutions included in his data set, and the fact that his data runs out just at the point where heightened competition appeared on the scene. Given these problems, it is strange that many people nonetheless continue to.place heavy reliance on Ausubel's research.
Access to credit cards is especially important for low-income borrowers, as they lack the options of more wealthy borrowers. For instance, low-income borrowers obviously will have less access to home equity loans than the rich. Absent credit cards, low-income borrowers faced with a short-term need for cash, such as the need for a new transmission for a car, will face an array of unfavorable options: selling personal assets, taking them to a pawn shop, or trying to get a short term loan from a bank that will probably charge them fees and an interest rate that substantially exceed that available on credit cards. Credit cards are a great convenience for many and there are few substitutes for the low transaction cost access to short-term credit offered by credit cards. See Dagobert L. Brito & Peter R. HartIcy, "Consumer Rationality and Credit Cards," 103 Journal of Political Economy 400 (1995). Access to credit cards have democratized credit, making its advantages available to all when it previously was available only to the elite.
Opponents of bankruptcy reform have trotted out a number of other misleading and irrelevant statistics designed to confuse the debate over the Act. For instance, critics of reform point to data that suggests that a certain percentage of bankruptcy debtors have been unemployed during the two years preceding bankruptcy, or have had health problems, or have gotten divorced, or suffered some other significant personal difficulty. This collection of data is somewhat interesting, and might be of some help if someone was considering scrapping the bankruptcy laws completely. But it is of questionable help in discussing bankruptcy reform generally, as it only studies those who have already filed bankruptcy and ignores those with similar problems who have not. See Michelle J. White, "Economic Versus Sociological Approaches to Legal Research: The Case of Bankruptcy," 25 Law and Society Review 685 (1991).
Even if this data were relevant in general, it is virtually useless in examining the provisions of the Act. The centerpiece of the Act is means-testing for high-income debtors who can repay a substantial portion of their debts with minimal economic or other hardship. The characteristics of the "average" or "typical" debtor is irrelevant; the Act targets the atypical, high-income filer.

Virtually by definition, those who have been unemployed for long periods of time will also have low incomes and thus will be unaffected by this provision of the Act; those who still have high incomes will find solace under the hardship exception of the Act. Moreover, means- testing does not deny anybody the right to file for bankruptcy or to receive a bankruptcy discharge, it just requires that if you file, and if you are a high income earner who can pay back a substantial portion of your debts without significant hardship, then you must pay what you can. So the sources of an individual's debts would seem to be largely irrelevant to the questions presented by the Act. Nothing in the means testing provision of the Act will take away the right to file bankruptcy, and most of those who are most vulnerable simply will be unaffected by its central provisions.
Factors such as unemployment, health problems, or divorce certainly account for some percentage of filers in the bankruptcy system, and certainly explain some of the regional variations in filing rates. But those problems simply cannot account for the nationwide 20% annual increases in bankruptcy filing rates we have seen in recent years. In an economy of low unemployment and high growth, unemployment cannot explain even a fraction of the 20% growth rates in bankruptcy filings during recent years. There has been no real increase in health care costs for several years, thus health care costs have remained constant even as bankruptcy filing rates have skyrocketed. Similarly, divorce rates have stabilized after years of rising. Given the facial implausibility of asserting these factors as explanations for surging bankruptcy filing rates, it should not be surprising that scientifically-controlled empirical studies have failed to find a correlation between these factors and bankruptcy filing rates.
Perhaps more interesting than what such scholars include on such lists is what is omitted. For instance, a 1997 Gallup Poll revealed that 10% of bankruptcy filers filed partly because of tax burdens, a percentage that exceeded college expenses and death in the family, and was five times higher than those reporting that gambling pushed them into bankruptcy. But this statistic reflects only the direct impact of taxes on bankruptcy and probably understates the true impact of high taxes on bankruptcy filing rates. Taxes devour massive amounts of personal income that would otherwise be available to finance consumption or savings without having to take on debt. Moreover, tax burdens have increased substantially during the same period that bankruptcies have risen, and now stand at 21.8% of GDP a record peacetime high. From 1990 to 1997 taxes increased 58%, by contrast, consumer spending increased only 43% during this period. This increased tax burden has been reflected in a savings rate in 1997 of 2.1%, the lowest level since the Great Depression. By eating away at individual incomes, taxes reduce personal savings rates, which may make households more vulnerable to income interruptions or large and unexpected increases in financial liabilities. While the effect of high taxes on bankruptcy has not been studied in detail, it is at least as plausible a factor as other factors that have been advanced, and it appears to be ideology rather than science that has led them to be artificially excluded from the debate.
The Future of Bankruptcy and Bankruptcy Reform
A world where financial promises are cast away at the first opportunity is not a pretty one. Consider Memphis, Tennessee, the "bankruptcy capital of America." In 1996, 4.3% of Memphis families filed bankruptcy, almost 1 in 23. According to a Fortune magazine article, there is a "culture of bankruptcy" and bankruptcy is a way of life." See Kim Clark, "Why So Many Americans are Going Bankrupt," Fortune 24 (Aug. 4, 1997). The implications of a world of such widespread bankruptcy are alarming. As I wrote with Judge Edith H. Jones, "In this post-bankruptcy apocalyptic world, trust has al but disappeared in routine arms'-length transactions that go unnoticed elsewhere." See Edith H. Jones and Todd J. Zywicki, "It's Time for Means-testing," 1999 BYU Law Review (Forthcoming 1999). Consider Fortune's description of everyday financial life in Memphis: "It's almost impossible to cash checks in Memphis. Used-car dealers charge their wholesale cost as a down payment. And lenders are either tightening or giving up."
A belief in promise-keeping and personal financial responsibility are valuable social values that can erode rapidly. In Memphis, everyone is considered a chea tuntil proven otherwise. The result has been to paralyze the system of consumer credit in Memphis. In the end, all consumers pay for bankruptcy through higher prices and higher interest rates. Reform the bankruptcy laws before all of America goes the way of Memphis - or beyond.
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