Get ready for a political tussle, the winds of bankruptcy reform are blowing. Jim Wasserman over at sacbee.com profiles a study that blames overspending as the leading cause of bankruptcy. The report was written by associate professor of management Ning Zhu from UC Davis, Graduate School of Management. Zhu claims debt caused over half of recent bankruptcies as opposed to the traditional leading causes of unemployment at 13% and medical bills at 5%.
Zhu points out debtors have “bigger mortgages and higher car loans and credit card balances” than people who do not file, a questionable assertion considering only 2 million or so filed bankruptcy in 2005 out of over 290 million people. It is hard to imagine that less than 1% of the population has more debt than the other 99%.
You can predict the relevance of this study. Zhu calls for reform of bankruptcy law to make it harder for people to avoid their debt. In 2005 Congress passed new bankruptcy legislation purportedly to prevent bankruptcy abuse. That law was widely criticized by Judges, Scholars and Bankruptcy Lawyers across the nation, including our own California bankruptcy expert Cathy Moran in Bankruptcy reform costly but pointless. At the time, proponants cited a magical mystical $400 per person invisible tax they claimed everyone paid due to misuse of the system.
In the face of the present mortgage lending mess and rising foreclosure cases, consumer advocates are calling for legislation giving homeowners a way to modify their mortgages through bankruptcy. Now, the Zhu study cites a need to stop debtors from overspending and filing bankruptcy on those high priced unaffordable mortgages. One can only wonder if this study will be the soundbite against efforts to provide real reform.
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