Byline: Joyce Barrett

WASHINGTON — Retailers want to make it tougher for consumers to dodge their debts by filing for bankruptcy protection, and they may get some indication today as to how successful they’ll be.
Spurred by reported losses that are climbing to $2 billion yearly, the industry is the prime mover behind an ambitious bankruptcy reform measure set to come before the House today. Aimed at curbing what some have charged are bankruptcies of convenience, the measure would stipulate that those seeking protection from creditors be subjected to a means test to determine whether they can repay a portion of their bills.
The bill faces tough opposition from the Clinton administration and some Democrats, who charge that the means test is arbitrary and rigid and that it would put payments for more pressing needs, such as child support and alimony, on a competing basis with credit card bills.
But industry officials and backers of the bill dismiss those charges and point to the abuses in bankruptcies.
“I can’t find a retailer that has not been hit by increases in bankruptcy in one way or another,” said Mallory Duncan, vice president general counsel for the National Retail Federation. “Companies with their own credit cards have been hit the worst.”
House Majority Leader Richard Armey (R., Tex.), predicts the measure will pass and says the bill “recreates responsibility and freedom while addressing this serious problem.”
The number of consumer bankruptcy filings nationwide, which in recent years have comprised more than 90 percent of all filings, rose to 1.3 million in 1997 compared to 495,553 filings in 1987, according to data from the National Bankruptcy Conference in Philadelphia. Data is incomplete on losses to the retail industry, but Duncan estimates it reaches $2 billion yearly.
Federated Department Stores counts the number of filings in which it was a creditor as 39,000 in 1994, representing $27 million in consumer debt, compared to 110,000 filings last year, representing $88 million in losses, said a Federated spokeswoman.
Most significantly, she pointed out, is that a quarter of those filing bankruptcy were current in their bill payments.
“We saw no indication that there was any financial difficulty or that there was a situation needing to be addressed,” she said. “Other retailers are seeing the same trends toward an easy out for consumers who decide to file bankruptcy and abuse the system. Certainly this is not happening in all cases, but it is in many cases.”
The reform package, sponsored by Rep. George Gekas (R., Pa.), chairman of the Commercial and Administrative Law Subcommittee, would establish a formula to be used in determining debtor eligibility for Chapter 7 bankruptcy relief, which permits discharge of eligible debts.
People with incomes of $50,000, comprising less than 30 percent of those seeking debt relief, would be subject to the means test. Those who don’t qualify for Chapter 7 would be denied bankruptcy relief or be moved to Chapter 13, which requires a repayment plan. It also would mandate repayment of debts owed to a single creditor and incurred within 90 days of applying for bankruptcy, and would extend the repayment period from five to seven years for some debtors.
Duncan of NRF estimates that after the means testing, just 10 to 11 percent of debtors would be moved to Chapter 13. The Clinton administration, however, estimated the proposed changes could cost the government up to $271 million over five years for the additional review that would be required on filing applications, for pilot programs, additional personnel, storage of the additional documents, compilation of bankruptcy statistics and provision of Internet access for filers.
Another version of bankruptcy reform is expected to be considered in the Senate by the end of July. That bill is not as favorable to creditors in that it would force them to file a motion to move bankruptcy from Chapter 7 to Chapter 13 and it would not happen automatically as in the House plan.
“The intention is good, the process is not as good,” said Duncan of NRF. The industry, however, is so hungry for reform that it is backing the Senate package in the hope of changing it when the two bills are reconciled in conference.
Critics are unrelenting in their opposition to the House bill.
“It’s a horrible piece of legislation,” said J. Ronald Trost, a New York business bankruptcy attorney and chairman of the National Bankruptcy Conference. “This reverses 100 years of bankruptcy policy in which we’ve allowed honest but in-debt people to get a fresh start. This will deny access to hundreds of thousands of working people who have no way of paying their credit card debt.”
Trost points a finger of blame at the credit industry, which makes unsolicited offers of credit to consumers.
“The ease of getting credit is the cause of these bankruptcies,” he said. “Retailers will have to tighten up on the availability of credit.”
Another critic of the credit industry is Sen. Barbara Boxer (D., Calif.), who maintains that if companies were more circumspect in credit offerings, bankruptcies would not be rising as such a rate.
The Federated spokeswoman, however, counters: “That’s ridiculous.”
She noted that 20 years ago creditors sent unsolicited credit cards to consumers in the mail. Today, the solicitation process has been made more complex, with consumers required to respond to mailings and then having to make a telephone call before activating their new cards. “It’s a matter of personal responsibility. That is the equivalent of blaming an auto maker for making a car that goes above the speed limit,” the spokeswoman said.
Reflecting retailer efforts to keep a firmer grasp on credit, Donald Banks, director of legal services for Retailers National Bank, Dayton Hudson Corp., testified before a Senate Judiciary Subcommittee in April 1997 that his firm was tightening up credit requirements after losing $22 million to bankruptcy in 1995.
“We use tremendous resources to try to determine who, among the people who want credit, is likely to repay the loans they want,” he testified. “We sometimes reject more than half of the credit applications we receive. Other creditors with typically higher credit line offerings may reject two thirds or more of their applications they receive. “Prescreening can filter out similar numbers of names on lists of potential direct mail offerees. We do our best to make correct decisions before we offer credit, before we accept an application for credit, and before we extend credit at point of sale.”
Furthermore, some retailers are seeing some improvement in the bankruptcy and bad debt situation.
Sears, Roebuck & Co., according to filings with the Securities and Exchange Commission, has stepped up its pursuit of delinquent accounts and is contacting customers with high balance accounts as soon as 10 days after their accounts are past due.
Arthur Martinez, chairman and ceo of Sears, has pointed out that the number of personal bankruptcies and the amount of dollars in delinquent accounts are beginning to decline. SEC documents indicate that the total chargeoffs as a percentage of the balance in the year ending April 30, 1998 were 8.58 percent, compared with 3.88 percent in 1995. But when asked about those numbers, Martinez said that the rate of increase is declining. “At some point bankruptcies have to decline because they have reached the saturation point,” he said.

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