Workshop on Bankruptcy

May 17–19, 2001
St. Louis, Missouri

Back to Workshop Program

A. Mechele Dickerson

INTRODUCTION

1. The Federal Public Assistance System
   1. In General
   2. Aid to Needy Families
      1. Overview
      2. Replacing Entitlement Policies with Work Policies
      3. The Role of Stigma
      4. Ending Welfare AAs We Know It@
      5. Conclusion
2. The Bankruptcy System
   1. History of the Discharge
   2. Current Use/Abuse of the Discharge
      1. Bankruptcy Opportunism
      2. Bankruptcy Stigma
3. Treating Bankruptcy as a Public Assistance Benefit
   1. Rights and Entitlement Politics
   2. Introducing Reciprocal Principles in Bankruptcy
   3. Justification for Means Testing
   4. Creating a Means Tested System
   5. Bankruptcy's Role in the Public Assistance System

CONCLUSION

Bankruptcy laws historically have been used to give financially beleaguered debtors a second chance, a clean economic slate. This may soon change. A means-tested bankruptcy system most likely will make some potential debtors become more fiscally responsible (and thus not need to file for bankruptcy at all). It is also likely, however, that other potential debtors will be discouraged from seeking to discharge their debts even though they may be in dire need of debt relief.

Until recently, means-testing proposals have had little success in Congress. Because of the dramatic increase in the number of bankruptcy filings during most years within the last 10-15 years, however, Congress now seems to be convinced that the goal of decreasing the number of filings now justifies imposing a means test. Though never explicitly stated, current criticisms of the bankruptcy system also appear to be based on the view that most debtors no longer are "honest, but unfortunate" but are, instead, abusing the bankruptcy system and treating bankruptcy relief as if it is a guaranteed federal entitlement.

The current push to means-test bankruptcy relief can be best explained by examining the recent shift in the public's attitudes toward entitlements in general, and the evolving public view of the recipients of public benefits. Means-testing has always played a role in federal public assistance programs, especially those historically characterized as "welfare" programs. These tests have been used primarily to make benefit recipients conform their future social and economic behavior to society's view of the model, economically self-sufficient citizen. In fact, even when welfare recipients were viewed with sympathy, they nonetheless were expected to become self-sufficient at some point in the future.

By the beginning of the last decade, critics of the certain welfare programs became convinced that the increasing number of people who received benefits proved that people were abusing this form of public assistance. Indeed, critics argued that welfare rolls kept expanding because recipients viewed welfare benefits as a guaranteed entitlement. To decrease the number of recipients, Congress passed a welfare reform package that now severely curtails a recipient's ability to receive public assistance.

The discussions that took place during the time of welfare reform suggest that public sentiment appears to demand that all public benefits that are not federally guaranteed entitlements (like social security benefits) must be means-tested. Thus, given the increase over the last decade in the number of people who filed bankruptcy petitions, it is not terribly surprising that Congress apparently will pass a bankruptcy reform package that will severely restrict a debtor's ability to discharge debts.

The traditionally sympathetic view of the "honest debtor" in need of a clean slate appears to have changed once Congress was lead to believe that individuals used the bankruptcy system to subsidize their reckless spending habits. Moreover, once Congress was convinced that filing for bankruptcy (once alleged to have been viewed with shame) is no longer a stigmatizing event, it seemed clear that the ability to discharge debts would be curtailed. In effect, once debtors B like welfare recipients B were viewed as unworthy recipients of any form of federal assistance, it seemed inevitable that Congress would restrict the benefits they could receive.

Making bankruptcy a means tested public assistance program is not, in principle, an irrational idea. Imposing a means test that restricts bankruptcy relief to those who can document a financial need is consistent with the types of restrictions Congress imposes on the recipients of non-entitlement public assistance benefits. Similarly, using a means test to stigmatize debtors and force them to modify their behavior is consistent with the role stigma played during welfare reform debates. A reasonable means-test can prevent truly undeserving poor debtors from discharging their debts, just as means-testing prevents the undeserving poor from receiving certain welfare benefits. Moreover, if bankruptcy is means-tested, then in return for providing an indirect cash benefit, this system reasonably can impose this country's economic values on the benefit recipients. In short, means-testing bankruptcy certainly can be justified as being consistent with the treatment Congress has given other recipients of non-entitlement federal assistance.

Though bankruptcy is not called a public assistance program, it nonetheless has served (and hopefully will continue to serve) as a social safety net for overburdened debtors. Thus, while bankruptcy relief should not be viewed as an entitlement, the ability to rely on federal law to receive economic assistance in the form of debt relief should be viewed as non-entitlement federal economic assistance. Supporters of the current bankruptcy reforms suggest that the net is being removed from greedy debtors, but that it will remain in place for needy debtors. Unfortunately, removing that safety net by telling all debtors that they should repay their debts, and by making it hard for all debtors to discharge any debts, inevitably will harm some needy debtors. Moreover, at least with respect to debtors who file for bankruptcy relief because of recent, unexpected life changes, the proposed reforms will neither necessarily decrease the number of those filings nor cause those types of debtors to repay more of their bills.

If debtors truly lack the ability to consistently pay their debts due to medical expenses, divorce expenses or expenses created by a job termination or restructure, telling them that they should try to repay their debts will not then cause those debts to be repaid. That is, simply imposing a means test will not, by itself, prevent debtors from overextending credit in the future. Instead, imposing a means test that prevents truly needy debtors from discharging debts will serve the goal of decreasing the number of filings but will to nothing to decrease the need to file. Since Congress is determined to make bankruptcy a means-tested system, if it really wants to decrease the need to file, the reformed system must also give debtors the skills needed to avoid the economic crises that caused them to seek to discharge their debts in the first place.