Round Two Honest Dialogue on Bankruptcy Reform

<p><img src="/AM/images/letters/r.gif" align="LEFT" border="0" vspace="5" hspace="5">ep. George Gekas (R-PA) recently reintroduced the bankruptcy bill that nearly became law
last fall, before the Senate simply ran out of time. The forces that were mobilized last year to
push for the passage of that law are still very much interested in bankruptcy reform, and can be
expected to lobby hard for quick passage of the bill as reintroduced.

</p><p>However, due to the work of Professors Culhane and White from Creighton University's School
of Law, at least one of the assumptions that served as a major linchpin in Congress' support for
the bill last year has now been called into question. A means-test along the lines of the one in the
current bill may not yield the perceived benefit that many members of Congress no doubt
believed they were voting to achieve. The story they have been told is that the large number of
bankruptcy filings, in the midst of the longest running economic recovery in our nation's
history, can only be explained by lax morals or intentional abuse. Apparently, the reality is
that most of the people who file have very little alternative—they are simply not making enough
money to pay the bills and still survive. The system is simply not heavily populated with rich
people using the bankruptcy laws to stiff their creditors.

</p><p>The long-running economic recovery is a rising tide, but it's one that apparently is not raising
all ships. Employment figures tell us that a larger proportion of the work-eligible population is
employed than ever before. However, they do not tell us a great deal about <i>underemployment</i>.
The bankruptcy filings might (perhaps) be an indicator that a significant percentage of the
population is underemployed and is therefore earning less. Of course, creditors do not reduce a
family's bills simply because the family has suffered a reduction in its income. We need only
read the newspapers to see that more and more businesses are merging, leading to industry
layoffs that force workers to find other jobs. What the newspaper stories (and the currently
available data) are not telling us is whether people who find other employment are successfully
replacing the level of income they once enjoyed. Nor are we learning whether people who are
laid off are able to maintain health insurance.

</p><p>Underemployment is certainly no sin. It is no moral failing. And if underemployment helps to
explain the current level of bankruptcy filings, then changing the bankruptcy laws to make it
yet <i>harder</i> on these people would be perverse and mean-spirited. Because the current data casts
considerable doubt on the popular explanations for the current level of bankruptcy filings, it
strikes me as common sense that members of Congress will want to know just a bit more about
what <i>is</i> at the root of the filing rate before they alter the law in ways that might do more harm
than good.^{<small><a href="#1" name="1a">1</a></small>} For example, if underemployment proves to be a root cause for the uptick, then of
course a change in the law designed to penalize debtors for filing would be the wrong medicine to
prescribe.

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<big><i><center>
Some changes in the law are no doubt in order, and bankruptcy
professionals need to be ready to accept the invitation to
engage in honest dialogue about what those changes ought to be.

</center></i></big>
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</blockquote></blockquote>

<p>Members of Congress need more than hard data, though. They also need to <i>see</i> what bankruptcy is
really all about; it needs to be humanized. There is a human being at the center of every
bankruptcy filing. Most of the time, the people find themselves at the end of their rope, unable
to see a way out of their financial predicament. Some have tried to talk to the credit card
companies about working something out, and can get no further than a telephone representative
who lacks authority to negotiate terms. Or worse, they can't even get anyone to call them back.
Just when they get one creditor in line, another creditor decides to try to shove to the head of the
line with some aggressive collection tactic. Family gatherings are strained and embarrassed.
Husbands and wives have fights over the bills, slashing at each other with recriminations.
Grocery shopping becomes a challenge.

</p><p>I'm not making this up. The stress of financial difficulty has struck all too close to home for
some family relations of mine. I've been enduring it with them. It's reminded me that, even
though most of the people who make the legislative decisions are fortunate enough to live a
lifestyle that is mercifully insulated from the pressures and realities that afflict so many
people who feel the pressure to file, a good portion of the men and women who serve in Congress
probably have family or friends who have been faced with these same hard choices. It is hard not
to be touched personally when financial reverses strike that close.

</p><p>Creditors are people too, and we rightly remember that creditors' interests have to be balanced
into the legislative equation. But I do not see evidence in the marketplace that banks are
failing, groaning under the weight of defaulted debt. To the contrary, the stock market is
pronouncing most lending institutions in fairly good health (with the possible caveat that some
lenders will suffer for loans made in Asia and South America). Mergers in banking, the auto
industry and retailing are creating stronger and more profitable companies in these areas. In
changing the bankruptcy laws to right any imbalance, we need to be certain where the imbalance
lies.

</p><p>Hopefully, the stridency that accompanied this important dialogue last year will give way to a
more considered evaluation of the causes (and effects) of bankruptcy. Some changes in the law
are no doubt in order, and bankruptcy professionals need to be ready to accept the invitation to
engage in honest dialogue about what those changes ought to be. Yet it is not hard to understand
what set off the opposition last year. Last year's bankruptcy legislation was accompanied by loud
denunciations dripping with innuendo and self-righteousness. If there is to be meaningful
dialogue, then it must be honest. If the current proponents of bankruptcy legislation insist on
demonizing debtors and if the current opponents of bankruptcy legislation demonize creditors,
then they have no cause to be surprised at the responses they get. In the real world, causes and
effects are considerably murkier than the tone of last year's debate suggested. All parties
concerned will do a better service if they go at this process with a good deal more intellectual
honesty—and a healthy dose of human compassion as well.

</p><hr>
<h3>Footnotes</h3>

<p>^{<small><a name="1">1</a></small>} Henry J. Sommer takes the position in his recent article <a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&amp;vr=1.0&amp;cite=… of the Consumer Bankruptcy Explosion: Debtor Abuse or Easy Credit," 27 <i>Hofstra Law Review</i>

33 (Fall 1998)</a> that the rise in bankruptcy filings is an entirely predictable consequence of the rise of the masive marketing of credit cards to lower-income people. See pages 37-40. <a href="#1a">Return to article</a>