Creditors would recover far less than previously thought if Congress enacts bankruptcy reform, according to a study released Tuesday.
Unsecured lenders would get about $800 million a year, not the $4 billion forecast in past studies financed by the industry, said Marianne B. Culhane and Michaela M. White of Creighton University School of Law in Omaha.
"Some portion of the Chapter 7 population indeed does have capacity to repay, but this number is far smaller than previously believed," said Samuel Gerdano, executive director of the nonpartisan American Bankruptcy Institute, which sponsored the study and unveiled it Tuesday on Capitol Hill.
Democratic lawmakers and consumer advocates seized on the study as proof that the overhaul should be scrapped. "The clanging noise you are hearing is the final nail in the coffin," said Mary Rouleau, legislative director of the Consumer Federation of America.
The House and Senate overwhelmingly passed bankruptcy reform bills this year, but Congress adjourned before the measures could be reconciled.
"The case for a rewrite of the bankruptcy code is simply not there," said Rep. Jerrold Nadler, a New York Democrat who has led opposition to the reform.
Industry advocates, however, said the study does not diminish the need to revamp the bankruptcy law. A record 1.4 million petitions were filed in the 1998 fiscal year, they noted. "There is still a broad consensus in Congress that something needs to be done about ever-escalating bankruptcy filings in good economic times," said Philip S. Corwin, a lobbyist at Federal Legislative Associates who represents the American Bankers Association.
The reform bills would enact a formula for deciding who eliminates unsecured debts in Chapter 7 or repays them in Chapter 13 of the bankruptcy code. Under one version, consumers would be barred from Chapter 7 if they earned more than 80% of the median income and could afford, after living expenses, to repay at least 20% of unsecured debt over five years. An Ernst & Young study estimated this requirement would force 15% of Chapter 7 filers into Chapter 13.
Since then, Congress has proposed a more liberal formula that would let more debtors qualify for Chapter 7. The American Bankruptcy Institute study is the first analysis of this plan. It found that only 3% of Chapter 7 filers would be forced into Chapter 13. The authors criticized the Ernst & Young study for excluding some living expenses.
