Personal bankruptcy filings for 1997 reached a record 1.33 million filings, almost 20% higher than the year before. This continuing trend is troublesome, since the economy has been enjoying healthy growth, relatively low levels of unemployment, modest personal income gains and high levels of consumer confidence. It appears that individuals may not be using bankruptcy as it was intended, as a method of getting back on one's feet after hard times. Instead, many individuals may be seeking bankruptcy protection to obtain a free ride, a method of having one's debt forgiven without having to demonstrate need. The economy as a whole incurs financial costs due to the personal bankruptcy system and these costs ultimately must be absorbed by all consumers, both through higher prices and more expensive credit. This study examines the size of these financial costs associated with today's personal bankruptcy system, and the potential savings or costs to the economy of a proposal to reform bankruptcy law.
The key findings of this study include:
These results quantify the financial costs of the bankruptcy system and the potential impacts of changes to this system. It is clear that limiting the availability of Chapter 7 to those who truly need it and requiring repayment of debts by those who are able, will minimize the losses due to bankruptcy while still providing the important benefits of bankruptcy relief
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1 A basis point is equivalent to 1/100th of a percentage point. For example, if an interest rate were to rise from 5.0% to 8.0%, the interest rate would have increased by 300 basis points.
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