Case Overview, Bankruptcy Reform

This document provides background information and summarizes the debate over Bankruptcy Reform. The links to the left will lead you to public documents that we have found.

           In Dickensian England, a debtor unable to come up with a payment to those he or she owed ended up in prison. And those who have read Dickens know that a debtor's prison was truly hell on earth. American debtors face a kinder fate when they go belly up. Bankruptcy laws allow for an orderly disposition of remaining resources and facilitate a settlement between the debtor and those who are owed money. Individuals who declare personal bankruptcy can usually avoid prison, provided they haven't committed fraud of some type.
           Those in the lending industry believe that bankruptcy laws are far too lenient. A lobbyist for a finance trade association summarized the case for a change in the current law: "There are really large numbers of bankruptcy filers, but there are particularly large losses that occur from high-income filers that use bankruptcy as a form of financial management to shield assets." At the heart of the proposed reform is the establishment of a "needs-based" bankruptcy system. One supporter said that this change "could distinguish between debtors who have virtually no assets or earning power and those with the ability to repay all or a significant portion of their debt." There are few who disagree that the bankruptcy laws are sometimes abused and many believe some changes should be made. Yet opposition has arisen from consumer groups, like the Consumer Federation of America and PIRG (the Public Interest Research Group), who believe that the finance industry would gain too much power with the changes being proposed.
           The direct opposition to bankruptcy reform, however, is weak and diffuse and the consumer groups have not stood in the way of legislation. Rather, the obstacle to a rewrite of bankruptcy law has been abortion. These two seemingly unrelated issues became intertwined because of protests by anti-abortion groups outside of abortion clinics and other venues that resulted in violations of various laws. For example, the virulently anti-abortion group, Operation Rescue, was ordered to pay $1.6 million to the National Organization for Women and Planned Parenthood for protest-related activity that was injurious to those organizations. As a matter of conscience, the organization declared bankruptcy rather than pay groups they regard as perpetrators of evil. For supporters of NOW and Planned Parenthood, this was a fundamental injustice. They had to pay out money because of direct damages and costs incurred because of the anti-abortion protests, but then the organization that violated the law declared bankruptcy to avoid paying them. (There were no assets left in the organization for the bankruptcy court to distribute to claimants.)
           The Senate version of this legislation has contained a provision that would exclude from bankruptcy settlements any civil claims that result from abortion clinic violence. Conservative Republicans have been put in a difficult position. They back the bankruptcy legislation but those who stand against abortion don't want to concede to the groups supporting abortion rights. This issue has bedeviled bankruptcy reform since the mid-1990's as Congress has been unable to reconcile the opposing sides. To the frustration of the many banking and finance trade associations that operate in Washington, the legislation remains bottled up.