Bankruptcy law does have supporters
Page | 1 | 2 | 3 | 4 |

Feldstein says the database has shown that once a place develops a very high filing rate, it typically stays high no matter what improvements occur in the local economy.

"Memphis is a prime example. The only possible explanation, we surmised, was loss of stigma attached to bankruptcy. That is, once bankruptcy becomes very common and everyone knows someone who has filed, a bankruptcy filing no longer seems very mysterious, embarrassing or shameful," he says.

Misuse of the law
Supporters of the law frequently cite fraud as the catalyst for change and point to findings by the Federal Bureau of Investigation, which estimated that 10 percent of bankruptcies have involved fraud, with "hiding of assets" as the most common type. Feldstein believes, based on bankruptcy petitions his researchers have examined, that the percentage is an understatement. He says the researchers found numerous incidents where the person's income was higher than stated.

"A man on one petition we read owed a single large debt for the purchase of a hot tub," says Feldstein. "He sought to have this debt and others expunged, but he also claimed he no longer had the hot tub, so it could not be repossessed and sold. He claimed it was stolen.

"We found that claim stretched credibility, since a typical hot tub contains about 400 gallons of water, weighing about 3,200 pounds, takes several hours to drain, and even when drained requires at least six men to lift and move. You would need a large team of thieves, a large truck and a full day of time to commit this theft."

Many advocates for the reformed bankruptcy law argue that consumers "gamed the system" too often.

In testimony from the American Bankers Association before the Senate Committee on Banking, Housing and Urban Affairs on March 25, 1999, a banker from New York said that a lawyer in his area advised clients to pay their nondischargeable debt with credit card cash advances and then file Chapter 7. The credit card balances, which are unsecured debt, could then be discharged.

"The system had gotten to a point where some people, some wealthy people, were using it as a financial planning tool," says Laura Fisher, spokeswoman for the American Bankers Association, which represents financial institutions.

The American Bankers Association estimates that 5 percent to 10 percent of filers in the new system will have to pay more of what they owe.

Proponents say costs resulting from the abuse ultimately meant higher down payments, higher interest rates and higher costs for goods and services.

Mallory Duncan, lobbyist for the National Retail Federation in Washington, D.C., says a lot of retailers extend credit to customers. When a customer files for Chapter 7 bankruptcy the retail cards get wiped out.