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Harris Sherline: The Modern Rise of Consumer Bankruptcy

The rules and social stigma have softened, but is that really progress?

By Harris Sherline, Noozhawk Columnist |

As governments, business entities and individuals around the world move inexorably closer to financial disaster, the history of bankruptcy and the attitudes of the public offer some insight into why bankruptcy has become so pervasive, especially in the Western societies.

People did not go bankrupt in the Middle Ages because the penalties for doing so were extremely draconian, including whipping and imprisonment.

Wikipedia notes: “In the old civilizations, such as ancient Rome, finding oneself in debt was the wrong thing to happen. The debtor could be sold into slavery to pay off the money owed, and if the debtor was not valuable enough as a potential slave, he would be chopped into pieces to satisfy his creditors. In the United Kingdom and America, debtors used to be imprisoned or made into indentured servants to pay off debt. The word ‘bankrupt’ comes from the Italian word banca rotta, which goes back to the days when creditors would break a deadbeat merchant’s bench.”

As a result, people avoided the formality of bankruptcy at almost any cost, which left them subject to the most extreme forms of confiscation of property and harassment.

Although the penalties that were imposed for bankruptcy became less draconian over time, the attitude toward those who filed bankruptcy continued to be negative well into the 20th century. As recently as 60 years ago, when I was starting out, people who filed bankruptcy were still viewed as deadbeats, with low moral character.

And, I can remember a time that it was not possible to file bankruptcy more than once. Eventually, the law was modified to permit a person to declare bankruptcy more frequently.

Today, a debtor cannot obtain a discharge in a Chapter 7 proceeding if they had previously obtained a discharge within the past eight years, or in a Chapter 13 case filed within the past six years.

Chapter 7 is generally used when a person has little property except for the basic necessities, such as furniture and clothing, and they have little or no money left after paying for their basic monthly expenses, or they are not even meeting their basic needs.

Chapter 13 is for debtors who have significant equity in a home of other property that they want to keep. Generally, they have regular income and can pay their living expenses but they are not able to keep up the scheduled payments on their debts. The process allows three to five years to catch up on their delinquent accounts, based on a schedule that is worked out with the bankruptcy trustee.

In addition to the foregoing changes, Congress enacted other modifications that are intended to reduce or eliminate the effect of the bankruptcy “stay,” which normally prevents creditors from pursuing collection. The stay will now last for just 30 days if a bankruptcy case of the debtor was pending within the preceding year but was dismissed, and it will simply not come into existence at all if two or more cases were pending within the preceding year but were dismissed. If a Chapter 7 case is dismissed for abuse and the debtor files under a new chapter (such as Chapter 13), however, the stay has its normal duration.

This is probably more than most people really want to know about bankruptcy, but it illustrates how the process has become increasingly complex over the years.

As time progressed over the intervening years, public attitudes toward bankruptcy also continued to soften to the point that today it is no longer considered a character flaw by most people, but is simply now viewed by many to be an easy way to get out from under the burden of paying such obligations as credit-card bills or mortgage payments.

An entire industry seems to have sprung up to feed off this market, running commercials to entice people to sign up and get out from under the burden of meeting their obligations. The recent federal legislation that has made it possible to avoid paying home loans and/or forgiving a portion of such debt is further evidence of the change it the attitude of borrowers toward honoring their commitments.

It may be progress in the eyes of some, but it’s a far cry from the time when it was considered a moral obligation to pay one’s bills.

— Harris R. Sherline is a retired CPA and former chairman and CEO of Santa Ynez Valley Hospital who as lived in Santa Barbara County for more than 30 years. He stays active writing opinion columns and his blog,

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» on 04.22.12 @ 07:51 PM

The unintended consequence of allowing people to repudiate their debt obligations, such as people who choose to walk away from a mortgage because their house is underwater, will ultimately severely limit the availability of credit to people with borderline credit profiles.

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