NRF Calls For Bankruptcy Reform
By George Anderson
The National Retail Federation (NRF) has urged the Senate to approve bankruptcy reform legislation contained in S. 256, the Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005, sponsored by Senate Finance Committee Chairman Charles Grassley (R-Iowa).
If approved, S. 256 would require people who can afford to repay a significant portion of their debt to do so under Chapter 13 rather than having all debts eliminated by filing
for Chapter 7.
In a letter to Majority Leader Bill Frist (R-Tenn), Steve Pfister, NRF’s senior vice president for government relations, wrote, “As retailers, we have seen firsthand the dramatic
effect bankruptcy has had on both consumers’ finances and on our ability to serve the public. These filings ultimately cost each of the millions of households we serve hundreds
of dollars in unseen costs every year. Unfortunately, many of those losses are the result of misuse of the law by irresponsible, higher-income individuals. Bankruptcy should not
be a mere convenience or financial planning tool, but rather a safety net for those who genuinely need it.”
Moderator’s Comment: Do you think the spirit of bankruptcy law protections are being circumvented by individuals and businesses? What has been the impact?
The Senate and House might look to tighten up the rules as it applies to business, as well.
On one day, investors can see the value of their holdings drop to zero because a company says it lacks the ability with cash and assets to pay off its creditors.
A few months go by and, after emerging from bankruptcy, the company starts selling off its ‘worthless’ assets, such as real estate, and suddenly it is flush
with cash. The practice may be legal and it may even be good business. That doesn’t make it right, however. –
George Anderson – Moderator
There could be no greater case study in this subject than Kmart, and now presently in the case of Winn-Dixie.
Both are excellent examples and could be argued either way, I suppose. The hardest part is the proposition of the ‘spirit’ of the law. It’s a problem with so many things. If the ‘spirit’ of the law is correct, then how do you reform it without impact to that same supposition?
I think that at the heart of the issue remains the reward for poor performance or worse yet, bad behavior. In the case of Kmart, I think you could argue that both of those conditions existed. In the case of Winn-Dixie, it’s simply (from my view) poor performance.
If the heart of that ‘spirit’ is to protect those that could be harmed in either case, then I would suggest reform be done carefully. On the other hand, as long as we continue to reward bad behavior and poor performance then those most at risk will remain those most likely harmed.
A little personal respect and shame in our industry both by the consumer and the industry wouldn’t hurt. Interestingly enough, on the same day, we discuss Martha Stewart and the likelyhood of the rewards there for bad behavior and less than standard ethics. This is a tough one. I hope we don’t harm the ‘spirit’ by a few making an attempt to legislate ethics and good behavior. I don’t think it’s possible. That leaves us with sort of a double edged sword, doesn’t it?
Absolutely. I am always horrified when I hear about individuals and companies that file for bankruptcy and then walk away from the chaos they have created. The situation is similar in the UK and it makes things particularly difficult for small business people who legitimately tried their very best but were simply unsuccessful. There will always be a handful of serial bankrupts who keep walking away today and starting afresh tomorrow then walking away again the day after that. If only there was some FAIR way to sort the wheat from the chaff.
One of my former clients filed for bankruptcy. The law said he could keep his house, and one car, and a certain amount of clothing. So he got to keep his mansion, his Mercedes, and most of his $1000 suits. He started a new company that bought his old company’s debts from creditors for pennies on the dollar. His commercial properties went into foreclosure. He bought them back at auction for pennies on the dollar free and clear.
My ancestors fled England in the 1600s to avoid paying their debts. Debts used to be carried forward from one generation to the next so grandchildren and great grandchildren would be responsible for the debts of long dead relatives (kind of the way the US Government works). I probably owe Bernice money to this day. Even after arriving in the USA, a few bad deals led to the loss of land and slaves to creditors. So they headed to the mountains of Virginia and became hillbillies to escape further financial persecution. Maybe its time to bring the old rules back.
There is nothing more sickening than to get paid a large fee up front by a bankrupt company, then go do the work. Just when you think the coast is clear, you get a letter from the bankruptcy court demanding you pay the money back because you are not a secured creditor. When you are a small businessman, you can become the innocent victim yourself and end up bankrupt.
Asked to critique this bill, all I can come up with is that it does not go far enough. I would not only curtail Chapter 7, I would abolish it. Under Chapter 7, the people you owe GET NOTHING. Why is that considered to be even remotely fair?
The “Spirit of the Bankruptcy Laws” is a slippery question. It has been explained to me before that the spirit of them is to have a more humane alternative to having debtor’s prisons. I’m not sure that getting rid of debtor’s prisons was that great of an idea.
Yes, I am writing as someone who was owed a great deal of money and never collected a penny due to our bankruptcy laws.
To say that “the spirit of bankruptcy law protections are being circumvented by individuals and businesses” is a little bit like saying that Jeff Gordon likes to drive fast. Of course they are and the cost is paid by the rest of us one way or another.
Of course there are a great many individuals and businesses who have no other option and who are forced to pursue bankruptcy, usually with a feeling of shame, as the only option. We certainly should not block access to this for those who, often through no fault of their own, have experienced some kind of economic catastrophe.
Unfortunately, there is no longer a social stigma in declaring personal bankruptcy. Individuals who have filed do not have a “ten year cooling off period” with regard to access to credit. Instead credit seems readily available and the downward spiral continues.
Although we should be able to differentiate between personal (racking up consumer debt) and castostrophic medical filings, I don’t seem to see any ideas brought forward.
Regretably, personal bankruptcy is reaching an epidemic stage.
Of course our bankruptcy laws are exploited beyond “the spirit of the law” — as is every other law on the books. Unless someone can find a cure for the common greed, Scanner has it right. You can’t legislate ethical behavior and morality.
Yes, our bankruptcy laws need to be amended, however they need to be changed not just for personal but also corporate bankruptcies. Is it right for MCI to be allowed to wipe out their debt by way of bankruptcy so they can come back and compete against other communication companies who don’t have the same “zero debt” balance sheet MCI does? Is it right for United Airlines to file bankruptcy to eliminate debt and reduce overhead to allow them to compete against airlines which managed themselves properly from the beginning? Is it fair for a person who is planning to file bankruptcy to move to Florida and invest as much of their assets in a home as possible so as to be able to able to shield it from creditors due to Florida’s law allowing a bankrupt person to retain their primary residence? In the end, it’s the consumer/taxpayer who winds up paying for all of this.
This so-called “reform” isn’t aimed at the high roller corporations or individuals who are wealthy enough to shelter assets (remember Mrs. Ken Lay complaining that they had to sell “almost all of their homes”?). Although I agree that individuals’ poor choices in running up debt should not be rewarded, the single biggest financial cause of personal bankruptcy is medical bills, hardly a choice for most people. The credit card industry pleads for relief from bankruptcy-related defaults, but takes no ownership of its share of the problem and continues to push credit under questionable terms to marginal people. Polonius was right: neither a borrower nor a lender be.
David – if you email me privately, I’ll give you an address where you can send the cheque. I could do with a new Mercedes.