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Q & A

How big a problem is personal bankruptcy?

Personal bankruptcies across the United States hit a record 1.35 million in 1997, with many analysts expecting another record in 1998. In fact, there has been close to a 370 percent increase in personal bankrupt-cies since 1980.

What laws govern consumer bankruptcy?

Bankruptcy laws vary from state to state, since states are permitted to set their own levels and types of asset exemptions. There are two main types of consumer bankruptcy protection: Chapter 7 and Chapter 13. About two-thirds of current filers choose Chapter 7 in which the debtor is required to give up nonexempt property (assets) to a trustee, who sells it and pays creditors with the proceeds. Exempt property includes assets that the law has deemed necessary to support the debtor and his dependents. Equity in a house, which is called a homestead exemption, is one example. Unsecured debt, like credit card debt, is wiped off the books, or discharged. Chapter 13 filers, on the other hand, are allowed to retain more assets than Chapter 7 filers, but must agree to pay creditors their outstanding debt—in full or in part—over a period of three to five years. In both types of debt, certain types of debt are not eligible for discharge, including alimony, recent income taxes, child support and government-backed student loans.

What is causing such increases in bankruptcies?

Economic factors like high debt-to-income ratios explain much of the increase in bankruptcy filing. Since 1980, lenders have reached out to borrowers who would not have met previous income and creditworthiness standards. While this "democratization of credit" has certainly benefited many households, it has also made it easier for them to live beyond their means. When polled, Americans filing for personal bankruptcy routinely list credit card bills as the pivotal factor in their decision. In addition, personal bankruptcies are strongly influenced by factors like divorce, medical bills and gambling, as well as state laws regarding wage garnishment and asset exemptions.

Is the government concerned about the level of personal bankruptcies?

The level of personal bankruptcies has captured the attention of both the media and policy-makers. In 1994, the National Bankruptcy Review Commission was formed to study the increase in consumer bankruptcies and to recommend changes in the current federal bankruptcy code. Both the House and Senate have recently passed bankruptcy reform bills that may increase the proportion of debtors filing for Chapter 13 bankruptcy.