Saturday, November 23, 2024

Bankruptcy change legislation passed Congress last week in a 302 to 126 vote and was signed into law 4/20/05 by President Bush (Whitehouse Press Release). The changes introduced by this bill are tough on consumers and good for banks. Banks are having their cake and eating it too, as the hackneyed-cliché goes.

This bill has been in the works for eight years. President Clinton vetoed the measure back in 2000 and the banks have been fighting ever since then to get it back on the table. Success for them is at hand, unfortunately for us.

The idea behind amending the bankruptcy law is to stop people from taking advantage of the system. Stop those who would abuse the law by hiding their assets in states where exemptions allow this protection and then claiming bankruptcy, thereby shedding their debt but still holding on to equity.

The reality is that the vast majority of those people seeking bankruptcy protection are not defrauding the system. These are legitimate claims of people who need a fresh start which is what bankruptcy law should be about.

Harvard Law School professor Elizabeth Warren, in her bankruptcy study found that the 90% or more of bankruptcies are still filed by people who get sick, get laid off, or get divorced, not by abusers. Even the industry can only show that 3% of those that go bankrupt might be abusing the system, still, this new law would harm all debtors.

Here are a few highlights of how bankruptcy law is affected:

Chapter 7 means test
Those seeking Chapter 7 must comply with income requirements. That means that they must make less that their state's annual household median income and have less than $100 per month available to repay their debts otherwise they will be forced to do a Chapter 13 bankruptcy. In Chapter 13, debtors restructure their debt and pay much of it back thereby losing that fresh start.

Increased cost of going bankrupt 
|Bankruptcy lawyers will be charging more fees because there will be more paperwork and time in court. Also, the attorneys must protect themselves because the new law has reforms that could possibly hold them liable if their clients commit fraud.

Cost of living 
The IRS (Internal Revenue Service) guidelines will determine allowed monthly spending for food, housing, clothing, etc. After taking these into account, the amount remaining must be used for debt repayment.

Forced credit counseling
Bankruptcy filers must seek credit counseling. This will also increase costs since they must pay counselors. However, I believe this requirement, and other aspects of the law, will crush the credit counseling industry. For one, people will simply want to fulfill this requirement so they can go bankrupt, and two, banks will reduce the "fair share" to counselors. Fair share is the percentage of the debt paid to counselors for helping to get consumers to pay. That's why I sometimes refer to credit counselors as voluntary debt collection agencies since they're paid by creditors. Banks will reduce this amount further because they know that people won't be able to avoid paying the debt back so why show they pay more to have it collected.

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