Twenty years ago personal bankruptcy was considered a “scarlet letter”, today it has become a “badge of honor” and if the National Bankruptcy Review Commission has its way bankruptcy will become even easier. The NBRC voted Friday to adopt a draft consumer bankruptcy proposal that permits, among other provisions, for debtors to discharge card debts that were obtained when the debtor did not have a reasonable ability to repay the debt. The Bankruptcy Issues Council urged the NBRC to consider a “needs-based” system which would continue to provide full debt-relief to those with no ability to repay but would also require debtors with steady incomes to repay a portion of what they owe. There were indications Friday afternoon the NBRC will be open to consider an alternate proposal at its August meeting since the current proposal, if presented to Congress in October, will lack credibility.
While expressing disappointment with a draft consumer bankruptcy proposal by the National Bankruptcy Review Commission that was adopted here today, the Bankruptcy Issues Council said it is encouraged that the Commission has indicated it is likely to consider an alternate proposal at its August meeting.
The BIC, a coalition of Visa, MasterCard and their member banks, said the plan voted on today does nothing to encourage those who could repay a portion of their debts to do so. The BIC urged the Commission to pursue instead a needs-based bankruptcy system that provides full debt relief for those with no ability to repay and encourages establishment of repayment schedules for those who can.
BIC members noted that the decision to leave the door open for a new proposal in August reflected the concern of Commissioner M. Caldwell Butler, the only Commissioner to have served in Congress, who said there was no consensus on the consumer bankruptcy framework and that the existing proposal was likely to lack credibility with Congress.
“We regard these concerns as an opportunity to continue to work with the Commission on a needs-based bankruptcy plan. At a time when statistics show that personal bankruptcies have hit an all-time high for the fifth consecutive quarter, the focus should be on designing a system that ensures full relief for those who need it but that also takes into account that many debtors need only partial relief and could repay some of what they own,” the Council said in a statement released after the vote today.
“We should not continue a system that punishes the overwhelming majority of people who pay their bills on time by making them pay for those who declare personal bankruptcy,” the statement said. “While it is the creditors who initially absorb this loss, it is consumers who will eventually feel the burden in increased prices and interest rates.”
“Last year, for the first time ever, more than one million Americans declared personal bankruptcy,” said Thomas A. Layman, senior vice president of Visa U.S.A. “The Commission’s current proposal does nothing to drive that number down and may, in fact, make it even easier to declare bankruptcy and have virtually all your debts erased. I am hopeful, however, that the Commission will use these next two months to craft a proposal that will make personal bankruptcy a last resort, not the first choice of debtors.”
“An individual should receive only as much debt relief as he or she needs, no more and no less.” said Richard Jones, vice president of MasterCard International. “Obviously, an individual in serious financial difficulty, with no means to repay his or her debts, should continue to have the bankruptcy option available as a way for a fresh start. But far too many Americans are declaring bankruptcy to having their debts erased despite the fact that they continue to have a job with a steady income and could repay a portion of what they owe.”
The National Bankruptcy Review Commission, created by Congress in 1994, is slated to propose a set of bankruptcy system reforms to Congress in October.
Under the current system, the overwhelming majority of individuals who declare personal bankruptcy – 70 percent – do so under Chapter 7, where their debts, for the most part, are erased without any consideration whether the individual could repay. Under Chapter 13, debtors are required to establish a timely repayment plan.
In addition to failing to provide a needs-based bankruptcy system, the BIC stated, the Commission also failed to limit the ability of creditors to seek reaffirmations of debts; to provide for automatic conversion of failed Chapter 13 repayment plans into Chapter ; and interfered with security interests.
The BIC also expressed concern with other specific elements of the Commission’s proposal, including provisions that would:
-Amend current law to make it significantly easier for debtors to avoid paying their credit card obligations, regardless of their ability to repay; and
– Permit debtors to discharge credit card debts that were obtained when, based on an objective review of the debtor’s finances, the debtor did not have a reasonable ability to repay the debt.
“We look forward to the opportunity to continue to work with the Commissioners in the coming months to craft a sensible, fair and effective alternative reform package that will have a real impact on the explosion of personal bankruptcies while protecting those consumers who need relief.”