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Bankers urge reforms of bankruptcy law amid record filings

December 18, 1996

WASHINGTON (AP) _ Bankers are calling for changes in a federal bankruptcy law that allows consumers to wipe away their debts even if they can still repay part of them.

Bankers told a bankruptcy review panel Tuesday a significant number of consumers get full relief from debts under Chapter 7 bankruptcy protection when they could have qualified for a repayment plan.

Chapter 7 of the bankruptcy code wipes out all debts. It is used in 70 percent of personal bankruptcies. Consumers who want to repay some debts file for relief under the code’s Chapter 13.

``Billions of dollars of relief wastefully are being provided to consumers each year when they don’t need it,″ said Michael F. McEneney, an attorney representing a coalition of banks and credit card issuers.

McEneney and other industry representatives testified before the National Bankruptcy Review Commission. The banking industry is struggling to respond to a record 1.1 million bankruptcies filed in the year ended Sept. 30.

The congressionally appointed panel is holding hearings to get information for a report on suggested reforms due by next October.

Bankers have cited escalating bankruptcies as a key problem in the credit card industry, which saw the percentage of delinquent credit card loans jump to 4.5 percent in the July-September period.

Purdue University professor Michael Staten said a sampling of personal bankruptcies in 12 American cities found 45 percent of those filing for Chapter 7 protection had income, after expenses, to repay some of their debts.

Staten, director of Purdue’s credit research center, said his study suggested all Chapter 7 filers nationwide had the ability to repay $5.8 billion over a three-year period. Staten’s research was sponsored by Visa and MasterCard.

Consumer groups say banks have contributed to the problem by flooding consumers with credit card solicitations. In the third quarter alone, banks added $7.5 billion in credit card loans.

The National Consumer Law Center, a Boston-based group, accused bankers and credit card lobbyists of ``scape-goating the bankruptcy system for losses caused by the industry’s own marketing of easy credit.″

``Families get suckered by teaser rates and low minimum payments offered by companies seeking extra profits based on high credit card interest rates,″ said Robert Hobbs, the center’s deputy director.

``It’s terribly cynical of them to try to close the court system to many of the families who have been hurt,″ he said.

However, McEneney said bank lending practices are not the issue.

``This is not an underwriting problem. It’s a fundamental problem with the bankruptcy code,″ he said.

Staten’s research, which looked at 3,500 personal bankruptcy filings, showed that on average 1,015 people who filed under Chapter 7 told the court they could repay 33.2 percent of their non-housing debt over 36 months.

``There are a number people, and it’s not a trivial number of people, who are filing Chapter 7 and who have a stated capacity to repay their debt,″ Staten said.

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