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Americans and Debt
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America and Debt

Some of the heated debate swirling around the proposed changes to U.S. bankruptcy laws is couched in moral terms. While not calling for a return of the debtors prisons made infamous by Dickens's Mr. Micawber and William Dorrit, some proponents hope for a return to a time when bankruptcy constituted a "shame" rather than a "strategy." Opponents say that few people file bankruptcy lightly — adding shame to stress won't help people pay their bills. What is agreed upon by both sides is that bankruptcies have skyrocketed in the last twenty-five years. In 1980, there were 1.27 personal bankruptcy filings per thousand people. In 2004, there were 5.32 per thousand. That's an increase of about 320 percent. Why the rates have risen remains a matter of debate.

Bankruptcy Law History

America's early bankruptcy history was a matter of cyclical lawmaking and repeal. Congress passed the first laws allowing for minimal debt relief in 1800 in response to a fiscal crisis and repealed the law three years later. Another crisis led to new laws in 1841 and during the general crisis of the Civil War. The Bankruptcy Act of 1898 was the first to give companies in distress an option of being protected from creditors. It was court challenges to these law which brought some of the terms used today into use — in 1915, the Supreme Court decision validated the laws, saying their purpose was to protect "honest debtors" and provide them with "a chance to start afresh." The Great Depression of the 1930s was the heyday of bankruptcy legislation including the Bankruptcy Act of 1933 and the Bankruptcy Act of 1934 and the Chandler Act of 1938 which charged the Securities and Commission to assist the Federal courts in cases of corporate reorganization.

The last major revision to bankruptcy laws was made in The Bankruptcy Reform Act of 1978, the basis for current practices of individual bankruptcies under Chapters 7 and 13. (Chapter 7 is a liquidation bankruptcy and includes the cancelation of debts. For individuals, Chapter 7 involves the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors. Chapter 13 is a bankruptcy involving the adjustment of debts for someone with regular income and includes a court-mandated repayment plan for a portion of the debt.) The 1978 Act did not cover tax related issues and this was addressed by the Bankruptcy Tax Act of 1980.

Economy watchers note that the consumer debt outlook has altered substantially in the twenty-seven years since the last bankruptcy reform. Consumer credit has risen over 90 percent from a 1980 per capita rate of $3,559 (in 2004 dollars) to $6,965 in 2004. Much of this increase is in the form of revolving credit — generally credit cards. Critics of the financial services industry say willingness to extend increasing amounts of credit is in part responsible for the rapid rise in bankruptcies. Proponents of the bankruptcy law reform say rather that many bankruptcies constitute an abuse of a too lenient system.

The nonpartisan think-tank the American Bankruptcy Institute reported in 1998 that cases where the system was abused accounted for less than 3 percent of the personal bankruptcy cases it reviewed. In addition, a new study from Harvard University found that it was illness or injury, not credit card use and misuse, which led to nearly 46 percent of filings, with job loss coming in a close second. Critics of the Harvard study say that the threshold for medical expenses was set too low at $1000.

Average Debt of American Families, by Income Range

Family Income GroupFamilies with credit cards, 2001Carholding families reporting debt, 2001Average household credit card debt, 2001Percent increase 1989-2001
All Families76%55%$4,12653%
$100,000 or more98%37%$7,13628%
Figures from Survey of Consumer Finances 1989, 1992, 1995, 1998, 2001, "Households at Risk," DEMOS


American Bankruptcy Institute
The American Bankruptcy Institute is the largest multi-disciplinary, non-partisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. ABI membership includes more than 10,000 attorneys, auctioneers, bankers, judges, lenders, professors, turnaround specialists, accountants and other bankruptcy professionals.

American Financial Services Association
Founded in 1916 and based in Washington, D.C., AFSA is the national trade association for consumer and commercial finance companies, "captive" auto finance/leasing companies, mortgage lenders, credit card issuers and other financial services firms that lend to consumers and small businesses. The site offers their reasons for backing bankruptcy reform.

Consumer Federation of America
CFA is an advocacy, research, education, and service organization. As an advocacy group, it works to advance pro-consumer policy on a variety of issues before Congress, the White House, federal and state regulatory agencies, state legislatures, and the courts.

DEMOS: Economic Opportunity, Debt & Bankruptcy
Material from the research and advocacy group on the bankruptcy bill and other current issues related to credit and debt in America.

Senator Charles Grassley, R, IA
Senator Grassley is one of the major backers of bankruptcy reform in the Senate. Read his Senate Committee on the Judiciary testimony, and get additional information on his views on the proposed bill.

The PBS special produced in conjunction with THE NEW YORK TIMES focuses on the growth of the American credit industry. Resources include streaming video of the full broadcast, extended interviews, studies and consumer tips.

Additional sources: "Bankruptcy bill leaves holes; Lawyers say new bill remains open to argument and interpretation," Kathleen Day and Caroline E. Mayer, THE WASHINGTON POST, March 23, 2005; "Debtor's Attorneys See Red in Bankruptcy Bill," Marcia Coyle, NEW JERSEY LAW JOURNAL, March 21, 2005; "Bankruptcy reform appears on its way," Joe Estrella, The Idaho Statesman, March 20, 2005; "Money Managing Your Money Digging a Deeper Hole," Jeff Kosseff and Julie Tripp, THE OREGONIAN, March 20, 2005; "Keeping Some Hiding Places," Albert B. Crenshaw, WASHINGTON POST, March 20, 2005; "Senate Passes Bill To Restrict Bankruptcy Credit Card Business Backed Measure to Collect More Debt," Kathleen Day, THE WASHINGTON POST, March 11, 2005.

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