Bankruptcy's Thriving Business

November 18, 1983

Report Outline
Business Bankruptcies
Personal Bankruptcies
Bankruptcy Courts in Limbo
Prospects for the Future
Special Focus

Business Bankruptcies

Going Out of Business: Its Changing Image

Bankruptcy — once considered the lot of the financially irresponsible or unfortunate — no longer seems to carry the stigma of personal dishonor it has in the past. Both business and personal bankruptcies are on the rise, and while filing for bankruptcy is still generally an act of last resort, it has become an effective business strategy for some corporations and individuals. Witness Continental Airlines, which, after filing for bankruptcy last September, announced it was no longer honoring collective bargaining agreements with the company's unions. Shortly thereafter, equally solvent Eastern Airlines threatened to follow Continental's example until it reached a compromise with some of its employees over labor concessions. A year before, Manville Corp., the giant asbestos producer, filed for bankruptcy in order to avoid paying millions of dollars in damages to former employees stricken with asbestosis and related diseases.

While such corporate maneuvers have aroused considerable controversy in recent months, the number of personal bankruptcies far exceeds business filings. Many observers attribute the rise in personal bankruptcies to such economic developments as inflation and recurrent recessions, which, together with the increasing availability of credit, have left many consumers stretched so thin that one unexpected expense is all it takes to drive them to bankruptcy court. The banking and credit industries, however, blame the trend on recent changes in bankruptcy law that allow individuals to go bankrupt without necessarily forfeiting their personal property. Charging that bankruptcy has' become an easy way out of paying bills, the banking lobby is pressing for changes in the law.

Complicating these issues is the question of who has judicial authority over bankruptcy cases. The Supreme Court in 1982 struck down the bankruptcy court structure set up by Congress in 1978. The court stayed its ruling for six months, but when Congress failed to amend the law within that period, the justices refused to extend the stay. Since then, the bankruptcy courts have operated under an interim rule promulgated by the U.S. Judicial Conference, the policy-making arm of the federal judiciary. As the bankruptcy caseload mounts, Congress continues to grapple with the issue.

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