LEXIS-NEXIS® Academic Universe-Document

LEXIS-NEXIS® Academic

March 21, 2000, Tuesday, Final Edition

SECTION: OP-ED; Pg. A25

LENGTH: 748 words

HEADLINE: Big Brother Bankruptcy

BYLINE: Steve France

BODY:

When President Clinton declared the end of the era of big government in 1997, most people thought it would be up to the Republican Congress to hold him to his pledge. When it comes to bankruptcy reform, however, it will be up to Clinton to hold the line.

After the "spend decade" of the '90s (when personal bankruptcies more than doubled), the House and Senate have each passed bills to tighten bankruptcy rules to restore the moral obligation to pay back debts. The moral intention of the bills is fine, and Clinton has said reform is needed, but the bills would inject big government into the consumer economy, with predictably dismal results. For the first time in our history, the bankruptcy system would be "needs-based." Only certain approved debtors could choose to liquidate in Chapter 7 bankruptcy. The rest could only embark on a Chapter 13 repayment plan: five years of indentured servitude during which the government, via a trustee and for the benefit of government-approved creditors, micromanages every aspect of the debtor's economic activity.

With the confidence of Soviet commissars, the designers of this legislation are not only ready to go from a voluntary to a mandatory system but have devised an elaborate "means testing" process to identify deserving debtors who will be allowed to use Chapter 7. Patterned on IRS rules for collecting delinquent taxes, the test says how much you should be able to pay back every month to your creditors for the next five years.

In the House bill, if you can squeeze out $ 100 a month after paying for peanut butter and bus fare, you are in the abuser category and headed for the purgatory of Chapter 13. Fifty dollars a month can tip the scales in the Senate bill's version of reform.

Senate sponsor Orrin Hatch (R-Utah) lamented to his colleagues in a recent floor speech that the moral stigma of filing for bankruptcy has faded in recent times and must be restored. He and the other reformers overlook the fact that the stigma of bankruptcy has less to do with morality than with ego. The bottom line is that few people care to be seen as losers or freeloaders--even in these fallen times.

Which explains why it has been so hard to find the abusers. The consumer credit industry, the tireless champion of this moral crusade, initially estimated that one-third of Chapter 7 filers could pay back substantial amounts of unsecured debt. Under pressure from independent researchers, the estimate dropped to 25 percent, then 15 percent, then 10 percent. The leading independent estimate is about 3 percent.

Now, no one has a problem going after that 3 percent. The question is how that affects the other 97 percent of debtors, who really are flat broke. Whether they got there as a result of illness in the family, lack of retirement savings, job loss, divorce, failed entrepreneurism or succumbing to the blandishments of easy credit, the expense, effort and uncertainty of the proposed system would impede their economic recovery.

Legions of consumers would shuffle through the marketplace dragging the leg irons of mandatory Chapter 13. Some consumers would become zombie debtors, unable to qualify for either Chapter 7 or 13. Others would opt for that evil twin of big government: no government. Undeclared income, hidden assets, legal subterfuges and false identities would be their response to reform.

The reform would shrink the legal refuge of bankruptcy, which was written into the Constitution, leaving a meaner, harsher consumer economy. The winners among creditors would be those with the sharpest lawyers, investigators and collectors.

Ironically, just as the big legislative fix nears enactment, the old free-market system is showing its resilience. The reformers have been reluctant to acknowledge it, but the bankruptcy rate has been dropping in the past 18 months. With no help from Congress, consumer lenders have learned to reduce their exposure to risky borrowers--and have reaped record profits. Without any extra doses of blame or punishment, borrowers are learning to manage their credit balances.

When Clinton vetoes the bill, he should remember to put it in GOP terms. His liberal advisers will urge eloquence on behalf of the small debtors and small creditors (such as child support claimants) left to the wolves of big credit. But the better argument is that the era of big government is over.

The writer is a Washington journalist covering bankruptcy reform.

LOAD-DATE: March 21, 2000