Bankers, attorneys disagree over why Nevada bankruptcies are skyrocketing

Brian Seals

Monday, March 9, 1998 | 9:25 a.m.

Las Vegas bankruptcy attorneys and Nevada bankers are at odds over why bankruptcies are skyrocketing and what should be done about the problem.

An estimated 1.3 million bankruptcy cases were filed in 1997, which amounts to about $40 billion in erased debt. The number of filings in 1997 is up from 200,000 in 1978. Consumer bankruptcy filings in Nevada have increased from 7,170 in 1994 to 13,028 in 1997.

This explosion of bankruptcy filings has Congress mulling proposals to reform federal bankruptcy laws -- measures that pit consumer groups against the credit industry. But Las Vegas bankruptcy attorney Frank Sorrentino says the system works well as it is. Like many consumer groups, he places much of the blame on aggressive credit card companies.

"Frankly, I think the system we have now works fine, if the credit card companies would tighten up their belt," Sorrentino said.

The sheer numbers of filings has some politicians, as well as credit and lending companies, saying that bankruptcy has lost its social stigma. They say bankruptcy is now a first, rather than last, resort.

Sorrentino said his experience belies that assertion. "I can't buy that. When folks come in to file bankruptcy, it's not something they do casually," he said.

Not so, says Nevada Bankers Association Executive Director Ted Wehking.

"In a strong economy bankruptcies should be going down. We're seeing the opposite. The system needs to be amended, because people are taking advantage of the system," he said.

Individuals have the option of filing under Chapter 7 (liquidation of assets) or Chapter 13 (a court-approved repayment plan.)

However, consumer groups fear reforms that limit Chapter 7 filings would pinch citizens who genuinely cannot pay their debts. "You can't get blood out of a stone. People file for Chapter 7 because they are broke," said Mary Rouleau of the Washington, D.C.-based Consumer Federation of America.

At least two bills in Congress are aimed at stemming the tide of bankruptcy. Rep. George Gekas, R-Pa., is sponsor of a bill that would, in part, establish a formula calculating the amount of financial relief needed by using a debtors' income and obligations in determining what they could repay. A debtor unable to repay all secured or priority debts and 20 percent of unsecured debts could file for Chapter 7 protection. Otherwise, the debtor would have to file under Chapter 13, which requires a repayment plan. The formula would not apply to debtors with annual income less than 75 percent of the national median family income.

Small businesses are also targeted under the bill. Gekas' proposal would enlarge the grounds for conversion of Chapter 11 filing to Chapter 7, which requires a bankruptcy trustee to liquidate the business.

Furthermore, the bill would require that consumers be informed of options other than bankruptcy and the implications filing would have on them.

Rep. Jerrold Nadler, D-N.Y., proposes establishing incentives for pursuing a Chapter 13 repayment plan. It would also prohibit wealthy debtors from shielding assets by buying expensive houses that would be protected from creditors. Consumer groups are backing it as a more moderate alternative to Gekas' proposal.

Bankruptcy attorney Gregory Koppe said the whole debate was much ado about nothing. Koope said the most likely reform to emerge would address what debtors could protect from liquidation, which varies from state to state even though bankruptcies are filed in federal court.

Wehking said extensive reforms are needed because the flurry of bankruptcy filings affects businesses and individuals with good credit in that banks charge more to lend money in order to recoup losses.

Wehking said consumer groups are making a hollow argument. "We're a society based on credit. If they put the screws to people who need credit, only people who don't need it could get it," he said. "The consumer has to take some responsibility for money management."