The right to default: when did bankruptcy become an accepted fixture of everyday life?

• Author: Cottle, Michelle

My friend "Tom" is your typical yuppie. He has the pretty wife, the cute kid, the well-paying job in high-tech, the two cars (one a Mercedes 300), the sailboat (a 35-footer rigged for racing)--and the obligatory Chapter 7 bankruptcy on his credit report.

Yes, this December Tom joined actress Kim Basinger and former baseball commissioner Bowie Kuhn among the swelling ranks of Americans taking advantage of Uncle Sam's debt forgiveness program.

By now you've all heard the disturbing news: Despite a thriving economy, and the decline in corporate bankruptcies, Americans are declaring personal bankruptcy in record numbers. When the American Bankruptcy Institute reported last summer that 1996 petitions were on track to hit a record 1.1 million, every newspaper in the country ran an article on our nation's consumer bankruptcy crisis. Leading off each piece was a disheartening tale about how some naive young couple (or single mom or grandmother) had either: a) been struck a devastating financial blow such as an unexpected illness or layoff or b) allowed themselves to sink slowly into a morass of unrecoverable credit card debt. The ultimate result: bankruptcy.

On the heels of these personal narratives came laundry lists of the common causes of consumer bankruptcy--job loss, divorce, high medical bills, car accidents, credit card debts--along with the requisite finger pointing: The lawyers blame the banks for making excess credit too obtainable; the banks blame the government for making filing too easy and the lawyers for being too quick to recommend bankruptcy; and everyone blames society for being morally bankrupt, thus removing the stigma from financial bankruptcy. But regardless of the experts quoted and the individuals profiled, at some point in every article, someone would note that Americans are operating so close to the financial edge that one unexpected expense pushes them over. In other words, the rise in bankruptcies is an unfortunate--but unavoidable--fact of modern life.

Maybe. But financial hardship has always been a part of life. Neither illness nor job loss is a recent invention. Yet the number of personal bankruptcy filings has tripled since 1981. Now, with the filing rate eight times that of the Depression era, most people agree that something needs to change.

Specifically, a measure of justice needs to be injected into the system. There is nothing inherently immoral about financial problems--or about a system that helps people deal with such problems. The injustice comes when debtors receive more relief than they need. Although a small percentage of people find themselves with debts that are more than they could ever repay, more often than not the problem is that people are unable to meet creditors' demands for payment right now. In an ideal world, bankruptcy would protect a debtor from creditor harassment while he worked out a repayment plan. Each creditor, in turn, would receive his fair share of the debtor's budgeted payments. Only individuals for whom repayment was an unreasonable burden would receive a total discharge of debt.

The current system, however, is far from that ideal. Hundreds of thousands of Americans are treating debt discharge as an entitlement, wiping their financial slates clean regardless of their income or assets. But reversing this trend will involve more than tweaking the existing bankruptcy code, because the rise in filings--estimated to have begun around 1981--cannot be traced to any single change in law or economic policy. Rather, four key developments began taking shape around that time whose combined influence created a debt-default juggernaut that shows no signs of slowing.

Nice n'Easy

To my friend Tom, the impetus behind the rise in filings is clear. "The system makes it too easy just to walk away from debt," he says. "It's a pathetic law"

He isn't far off base. Under the Bankruptcy Act of 1898, debt forgiveness was an ill-defined, cumbersome process. The Bankruptcy Reform Act of 1978 changed all that. Today's filing process is relatively quick, easy, and cheap, with court filing fees running well under $200. A debtor's first step is to determine which of the two main consumer filing options he needs, Chapter 7 or Chapter 13. Chapter 13 is known as a wage-earner plan. It allows debtors to shelter their assets from repossession while working with a court-appointed trustee to draw up a repayment schedule. Repayment plans typically last three to five years, at the end of which the remainder of the debt is discharged. Far more popular is Chapter 7 liquidation, which accounted for 70 percent of 1996 consumer filings. Under Chapter 7, debtors are allowed a certain number of property exemptions, broken down by category: $15,000 in home equity, $1,000 in jewelry, $8,000 in furnishings, and so on. Remaining assets are collected and sold off by a trustee, who distributes the proceeds to the various creditors. (The trustee receives a commission based on the amount recovered.) Most Chapter 7s, however, are ruled no-asset cases, which means unsecured creditors (those to whom significant collateral, such as a car or home, has not been pledged...