It's become just too easy for individuals to declare bankruptcy. About 182,000 Americans filed for bankruptcy in 1978, the year federal insolvency laws were last revised. By last year, that figure had mushroomed to 1.4 million.
When people don't pay their debts, it costs everyone. Lenders estimate that the average American household pays $400 a year in higher prices and interest rates as a result of the skyrocketing bankruptcy rate.
The problem: Too many people are allowed to file for bankruptcy under Chapter 7, which wipes out debt after the debtor's assets are sold off. Under the tighter provisions of Chapter 13, a debtor must work out an agreement with creditors to partially repay the amount due. This allows unsecured creditors (those who loaned without collateral) to get back at least some of their money.
Congress tried last year to update bankruptcy law, but the measure bogged down in the Senate. Now the House has passed a new measure and the issue has moved back to the Senate.
The House bill, passed by a veto-proof margin last week, would steer more cases into Chapter 13 using a means test based on income and an IRS formula for living expenses.
Consumer groups and others blame the high insolvency rate on banks and credit-card companies that offer too much credit to people who can't afford it. They criticize the companies' endless solicitations and "teaser rates," in which a cardholder gets a low interest rate for a few months only to balloon later.
The Clinton administration threatens to veto the bill. It condemns the means test as "inflexible and arbitrary," demanding more discretion for bankruptcy judges.
It's true the credit industry lends promiscuously and should clean up its act. It sometimes sends out misleading solicitations. Its monthly minimum payments can be less than what is needed to pay down the debt, meaning a consumer can faithfully make the required payments and owe more at the end of a year instead of less.
Amendments added to the bill on the House floor deal with some of these issues. One offered by moderate Democrats would increase disclosure requirements regarding payments and teaser rates. The bill also makes child-support payments a top priority in bankruptcy claims and excludes Social Security payments from income calculations.
The Senate bill is less specific, which could mean a floor fight and tough negotiations with the House. The issue of whether the IRS formula is fair will have to be addressed.
In the end, it's clear that few people are forced to accept a credit card or use it. On the other hand, financial crises brought on by illness, job loss, or divorce can lead to legitimate bankruptcies. As a general rule, however, people should be held responsible for their spending decisions and for the debts they incur.
The Senate should follow the House's lead, make needed adjustments, and the president should sign the final bill.