From the time of the pilgrims, the chance for a new beginning has been part of the idea of America. Perhaps nowhere is this spelled out more explicitly than in the clause in the U.S. Constitution that reads, "...and Congress may establish a uniform law of bankruptcies." The Founding Fathers--not a few of whom had personal financial difficulties--perceived that allowing people to persist in financial servitude due to unpayable debts would create social disruption.
Yet what if Americans abuse their bankruptcy privilege to skip out on debts they could very well pay? The consumer-credit industry maintains that we are doing just this on a burgeoning scale. Industry representatives point to the fact that personal bankruptcy filings hit an all-time high of 1.4 million in 1997, during a period of low unemployment when consumers were in their best financial shape in many years. Moreover, filings have been rising 15 percent per year on average for the past decade and a half. Since 1992, seven million families have publicly declared themselves unable to meet their financial obligations.
Credit industry analysts hold that the stigma of bankruptcy has traditionally kept people honest about their ability to pay debts. Earlier generations of debtors lashed themselves to austerity budgets, sold off possessions, and worked extra shifts to avoid the shame of defaulting. But today, says the industry, many debtors have come to see bankruptcy as a convenient loophole against collections.
Elizabeth Warren, Gottlieb professor of law, rejects the "brazen
bankrupt" hypothesis. With collaborators Teresa Sullivan
and Jay Westbrook of the University of Texas at Austin, Warren
has been collecting data on a large sample of bankruptcy filers
since 1981. "If stigma had
declined," says Warren, "you would expect to see relatively more prosperous people going into bankruptcy, and you would expect them to declare earlier rather than later in their economic collapse. Instead, people who file for bankruptcy today are in worse condition than their counterparts who filed 15 years ago." Bankruptcy filers' median family income in constant dollars fell more than 25 percent from 1981 to 1997. The average 1981 filer went before a judge with debts that equaled 60 percent of a year's income, while the average 1997 filer held off until owing 80 percent of a year's income.
Warren's study participants fill out confidential questionnaires, and their answers hardly reflect blasé attitudes. "Their words are filled with pain and even self-loathing over the revelation of what failures they are, and how badly they have done in the great American economic game," says Warren. "I never sit down and read the questionnaires without at some point having tears in my eyes, over what these people are saying about the most intimate part of their lives." Along with personal shortcomings, the great majority of respondents cited job disruption, an illness, or a family crisis as having contributed to their ruin. Documents required by bankruptcy courts confirm that most of these calamities actually happened.
The fundamental reason for the epidemic of financial failures, Warren concludes, is that more Americans simply owe more and more money. According to the Federal Reserve, total consumer non-mortgage debt in September 1998 stood at $1.3 trillion, including $548 billion in "revolving credit" (i.e., credit card debt). In fact, American consumers as a whole spent more in October 1998 than they earned. "Many people are wound too tight," Warren says. "After they pay their basic expenses and the minimum on their credit cards, there's very little left. They've put themselves in a position where they can keep going as long as everything runs smoothly, but they are extremely vulnerable if anything goes wrong. As soon as they hit one of life's bumps in the road, they're into the ditch." Thus, Warren observes, it is the rising comfort in incurring debt--itself once stigmatized--rather than changed attitudes toward declaring bankruptcy, that underlies the wave of filings.
Last year the credit industry spent $40 million lobbying Congress to enact restrictions on eligibility for bankruptcy protection and less forgiving terms for dissolving debts. One proposed law would have the IRS audit bankruptcy filers and impose monthly budgets on debtors it deems good for more than a minimum portion of what they owe. The legislative offensive ultimately sputtered at the last minute, but its supporters have promised to try again.
In Warren's view, the industry's proposals would certainly deter anyone who sees bankruptcy as an easy out, but fail to address the underlying issue of too much borrowing--particularly high-interest credit-card borrowing. Stanching the stream of bankruptcy will require great discipline on the part of lenders and borrowers. "The bankruptcy rate was steady for two decades before 1984," she notes, "and then jumped when most states deregulated interest rates on credit cards." Because credit-card issuers' costs have fallen in the ensuing years, their profits have continued to rise even as bankruptcies have proliferated. This has made them extremely eager to sell Americans more debt--as a tally of the blandishments in the daily mail will confirm.
"Credit issuers and American families have become willing partners in a pact in which Americans are going deeper and deeper into debt," Warren says. "Moreover, most economists want consumers to continue to spend, lest our current unprecedented boom cool off." So that soft, accelerating tattoo behind the hum of this country's prosperity is the sound of people hitting the wall.
~ David Anderson