Bankruptcy Reform Essay Research Paper In spite

Bankruptcy Reform Essay, Research Paper

In spite of Georgia’s strong economy, bankruptcy filings are at record levels. During 1998, the number of filings exceeded 1.43 million nationwide with nearly 97 percent attributable to consumer bankruptcies. These record filings in the midst of a booming economy and low unemployment is clear indication that the system is broken and needs reform.

This rapid rise in personal bankruptcies and a near-record high in business bankruptcies is a trend that must be reversed. L. Wesley Smith, President of the Northwest Georgia Bank in Ringgold and the 1998-99 Chairman of the Georgia Bankers Association said, “We believe education is one of keys to help consumers and businesses understand the consequences of filing bankruptcy. There are other alternatives to bankruptcy many people never consider simply because they oftentimes do not know what to do with mounting debts. Far too many people consider bankruptcy as their first alternative, instead of their last resort as contemplated by the bankruptcy laws over the years.”

U.S. bankruptcy laws were first written around the turn of the century to provide a fresh start for people who through hardship or loss were unable to meet their financial responsibilities. No significant changes were made to this law until 1978, when Congress passed the Bankruptcy Reform Act making it easier for consumers to declare bankruptcy – and more difficult for creditors to collect debts.

There are three principal types of bankruptcy filings. Businesses may file under Chapter 11 which in its simplest terms, allows a business to remain in business and reorganize its debts while trying to reverse what seems to be a death spiral into oblivion. Since creditors are held at bay, cash flow usually improves and some businesses are able to work their way out of the filing over time. Unfortunately, there has been a growing trend by many businesses in Chapter 11 to extend the protection for years which was never the intent of the bankruptcy laws.

Consumers file for bankruptcy protection under either one of two Chapters in the Bankruptcy Code. Under a Chapter 7 filing, debtors are allowed to keep essentials such as a portion of the equity in cars and homes, the tools of their trade, cash on hand, furniture and clothing. All other assets such as land, jewelry, stocks and bonds and other investments must be forfeited. These forfeited assets are then sold and creditors are paid on a pro rata basis. However, debtors may also file a “no assets” Chapter 7, declaring that they have no assets available to pay off any part of their debts.

Whether or not the debtor forfeits assets, at the completion of the Chapter 7 process, the person is discharged from any remaining debts. Under a Chapter 13 filing, a debtor who has a steady income devises a plan to pay off as much debt as possible over a 3-5 year period. The repayment plan is then administered by a trustee of the U.S. Bankruptcy Court. At the end of the agreed upon time, the debtor is discharged from any debt still remaining.

Chapter 7 is where the tremendous growth of personal bankruptcies has occurred and many individuals file for liquidation without ever having missed a payment on a loan. The growing number of business and consumer bankruptcies caused Congress to create The National Bankruptcy Review Commission to make recommendations to the Congress on ways to both improve the system and to limit bankruptcy protection to the truly needy. As with any Commission of this nature, their recommendations will not be unanimously endorsed when their work is completed; however, both lender and creditor groups applauded its creation.

Initial reports from the Commission have proven interesting. There is general agreement on their recommendations relating to business bankruptcies. The Commission has initially adopted recommended changes to the small-business bankruptcy provision of the Code so that its protection will be afforded to only those businesses with a chance to survive. Chapter 11 abuses have been rampant and many thousands of businesses continue to operate under its protection only to be liquidated at the end of the protection period. In a recent interview, one of the Review Commissioners discussed the need to make a distinction between small businesses that can survive and those that cannot. Reducing the caseload in the bankruptcy courts in this manner will save the courts time and money, both of which are in short supply.

One of the major concerns of creditors is that the rapid rise in the number of bankruptcies is causing an equally rapid rise in the cost of bankruptcies. In the third quarter of 1996, Chapter 7 filings represented an estimated $10 billion of unsecured consumer debt that creditors are unlikely to ever recover. But creditors are not alone in bearing the losses of personal bankruptcies. Bankruptcies have a direct impact on many businesses such as lenders, home builders, retailers and auto dealers. The losses suffered by these businesses are passed along to their customers in the form of higher prices on goods and services. Last year, about .6 percent of the U.S. population filed for bankruptcy, while the remaining 99.4 percent paid a price for each filing – about $400 per adult.

In response to this growing problem, Congressmen Bill McCollum (R-FL) and Rich Boucher (D-VA) introduced H.R. 2500, t