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
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.
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
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.