Threat of legislation prompting more bankruptcies

Brian Seals

Tuesday, Dec. 1, 1998 | 11:31 a.m.

Continued population growth and the threat of reform legislation has resulted in a record number of bankruptcies in Southern Nevada thus far in 1998.

Through the third quarter, bankruptcies in the southern portion of the state increased by 1,403 filings from the same period last year.

In all of 1997, 10,008 bankruptcies were filed in Nevada's Southern District of U.S. Bankruptcy Court. This year, there were 10,000 filings by the first of November.

While some of the increase represents a continuation of a trend as more people move to the Las Vegas Valley, the prospect of changes in bankruptcy law also contributed to the rise.

"It's a combination of both," said attorney Jan Smith. "We were having people come in because it may not be available."

Smith said about 60 percent of the filings in her office were prompted by the possibility of legislation that would have limited who could file for Chapter 7 bankruptcy.

Tax attorney Mark Segal agreed the prospect of reform pushed people to file.

"The legislation certainly did not favor debtors," he said. "It was draconian. It was mean-spirited."

Generally, consumers have two choices when filing for bankruptcy -- Chapter 7, liquidation of assets; or Chapter 13, repayment of certain debts.

A bill sponsored by Pennsylvania Congressman George Gekas would have limited who could file for Chapter 7 bankruptcy protection. The measure passed both chambers of Congress, but died in a conference committee when Congress adjourned for the year.

The bill would have established a means test for consumers wishing to file under Chapter 7. If a debtor could repay all secured and priority debts, and 20 percent of unsecured debts over five years, he or she would be forced into Chapter 13 bankruptcy. Secured debts are things like car loans and mortgages, priority debts are obligations such as taxes and child support and unsecured debts include obligations such as installment loans and credit card bills.

Though the issue is expected to be resurrected in the coming 106th Congress, Gekas press secretary Carey Dearnley said if the bill is reintroduced it probably won't be in the same form as debated this year and it is unclear whether a means test would be part of that legislation.

"That's not been decided yet," Dearnley said. "We don't know what the bill is going to look like."

While bankruptcy attorneys offer varied opinions on why bankruptcies continue to increase, most offer a consensus opinion that Congress' effort at reform last session was misguided.

The problem is, said Smith, the means test formula could still leave people unable to pay both living expenses and bills. She used an example of a person who lost a job, then came to Las Vegas because of its reputation of job availability.

Jobs in the Valley are generally low wage, and the person may settle for an amount that allows them to get by, Smith said. That may not be enough to enable them to pay the 20 percent of their unsecured debt.

Also, such a scenario places priority payments like child support, a priority debt, on par with credit card payments.

"The problem is, the pie doesn't grow," Smith said.

Segal agreed, saying the reform effort was an atom bomb when all that was needed was a BB gun. He said the end result would be that people would have been less likely to file for bankruptcy at all.

"I really think what we would have seen is fewer dollars being paid to creditors," Segal said. "I really think in the long run fewer people would be willing to go through the bankruptcy process."

Segal said the current system works well, noting bankruptcy judges are good at spotting cases that may be abusive to the system. Moreover, most people who file bankruptcy have a genuine need due to a catastrophe such as loss of a job, illness or divorce.

"I don't see a need for overall drastic changes," he said.

Nor does attorney James Shea, who noted there is already a provision in the bankruptcy code that allows trustees and judges discretion to deny Chapter 7 status if they believe the debtors are abusing the system, leaving consumers the Chapter 13 option.

But Smith said there is room for some reforms. For starters, she said more consumer education should be part of the bankruptcy process. Also, she said the bankruptcy system is overburdened and more judges and administrative personnel are needed.

However, credit card companies and retail organizations are calling for more drastic reforms, similar to the measure debated in the last Congress.

"We believe there should be some sort of objective income test," said Mallory Duncan, vice president and counsel for the National Retail Federation.

Duncan said most people filing Chapter 7 genuinely need relief, but the Federation is concerned about upper-income consumers walking away from their debt. He said those forgiven debts are passed on to others in the form of higher prices.

The upward trend of bankruptcies in the Silver State began before this year. In 1997, one out of every 46 households in the state filed for bankruptcy -- a mark that placed Nevada at No. 3 for bankruptcies per household, behind Tennessee and Georgia. The national average was one household in 70, according to the American Bankruptcy Institute.

Of Southern Nevada's 10,008 bankruptcies in 1997, 176 were businesses and the rest consumers. There were 13,268 bankruptcies statewide in Nevada in 1997.

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