"Bankruptcy Reform" - what will it mean for the consumer?
I have waited several months to write this column on the effects of "bankruptcy reform", thinking unrealistically that the Congress would actually reach a consensus and pass some form of bankruptcy legislation in less than eighteen months. The reform package was rumored to be close to passage in September of 2001, but the terrorist attacks of September 11 forced much of the country's legislative agenda to the back burner. When discussions on bankruptcy reform resumed in the spring of 2002, several impediments to passage appeared, including the most publicized issue, whether the bankruptcy bill would include a provision preventing those who block access to abortion clinics in protest from discharging debts incurred in criminal or civil lawsuits regarding those blockades. As of October 30, 2002, there were at least five different versions of the bankruptcy reform legislation floating around the U.S. House of Representatives, and Congress had gone home for the holidays to address a much more pressing issue, campaigning for reelection.
When and if bankruptcy reform legislation passes, the effect of the changes will be to make it harder for people with unsecured debt to qualify to file a Chapter 7 bankruptcy (also known as a "liquidation bankruptcy") and, if they do qualify, harder to discharge the debts that aggressive credit card distributors have made it so easy to incur. A handful of banks have saturated the public with offers of credit over the last several years while employing relaxed standards for evaluating the credit-worthiness and ability to repay of such customers. Combine the unwise extending of credit and a downturn in the economy with the fact that many of these banks charge up to and over twenty percent annual compound interest, and it is hardly surprising that these credit monoliths have gotten up to their knees in delinquent accounts and debtors discharging those accounts in bankruptcy. Given the chance to take responsibility for their poor business judgment, many of those banks instead banded together to lobby Congress for "bankruptcy reform".
Among ways that the proposed legislation would help banks at the expense of debtors:
1) A formula would be created, taking into account the debtor's median monthly income, his income available for payment of debts, and the amount of the debtor's unsecured debt. If the debtor has more money available than the formula says he should, the burden of proof would switch to the debtor to show that there a special circumstances that do not make the filing of the petition "abusive". If the debtor's income is above a predetermined median, abuse can be alleged by the Judge, Bankruptcy trustee or creditors.
2) If the filing is found to be "abusive", a change in the law would allow the Bankruptcy trustee to seek costs and attorneys fees from the debtor's lawyer. This provision will drive many attorneys out of the bankruptcy field and will increase the fees most other lawyers must charge to practice bankruptcy as their liability insurance rates are increased.
3) A debtor who previously received a Chapter 7 discharge would have to wait eight years to file Chapter 7 again, up from the current six years.
4) A debtor would have to provide to the trustee (and to any creditor making the request) copies of his most recent tax return. If the Judge, a trustee or a creditor requested it, the return must be filed with the Court along with any tax return that was past due during the previous three years. That's right, the debtor's tax returns would become a matter of public record; apparently the cost of filing a Chapter 7 would include not only the filing fee, attorneys fees and damage to credit rating, but a surrender of the right to privacy in one's financial information.
5) Debtors would be ineligible to file bankruptcy unless they submit to court-approved "credit counseling" and assistance in performing an initial budget analysis. The debtor would have to file a certificate from the counselor along with any debt repayment plan developed with the counselor. If the court district didn't have the counseling available, the requirement would be waived.
When and if bankruptcy reform passes, it is likely that the changes to the Bankruptcy Code will not take effect for 180 days, during which time the rate of bankruptcy filings will likely climb to levels not seen in decades. The good news for debtors is that Congress has yet to reach agreement on this bill, and it's unclear when and if that agreement will be reached. In my ideal world, our representatives are torn between banks and corporate America, which supply the vast majority of campaign funding, and people who have significant unsecured debt, which make up a vast majority of people who vote.
Ken Runes
October, 2002
Post Script - On November 14, 2002, the Bankruptcy Reform bill finally was brought to a vote in the U.S. House of Representatives and was defeated by an overwhelming margin. The shocking reversal of fortune for the pro-business legislation was attributed to a coalition of anti-abortion Republicans and liberal Democrats, many voting contrary to the wishes of financial institutions which contributed to their campaigns. Many pundits and political analysts are suggesting that Bankruptcy Reform will not be brought up again in the new congress because business lobbyists are tired of pouring time and money into a losing fight. My own view and that of many of my colleagues is that the business lobbyists will put this issue back on the table in the next Congress, counting on the Republican majority in the Senate and the House to finally ram the consumer-hostile bill into law. Stay tuned.
We are a Debt Relief Agency under 11 U.S.C. 101. We help people file for Bankruptcy under the Bankruptcy Code.
Ken Runes
November 29, 2002
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