| Bankruptcy
law changes won't help economy because they're lopsided
By Kevin Nielsen
November 14, 2005 | The
United States Congress this spring passed the Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005
(BAPCPA), which made it more difficult for those with
consumer debts to file for Chapter 7 bankruptcy.
The major push for this new legislation
came from the consumer credit industry. Credit card
companies and anyone else who gives people lines of
credit would like to make sure people actually pay them
back.
The companies should be concerned
since they just give credit away. On average, I could
get two new credit cards with at least $2,000 on them
a week. That's without me soliciting anything, they
just show up. As everyone could be pre-approved for
some form of credit they should probably also be pre-approved
to pay back that credit. Since paying back borrowed
money has become more of a problem with the increased
credit given out, the push for better bankruptcy laws
seemed to be needed, at least to the creditors.
The BAPCPA does have some good points
even though it was lobbied for heavily by the creditors
themselves.
When a person files for bankruptcy
and their debts are primarily consumer debts, they are
required to seek credit counseling and financial education.
At the same time the role lawyers play in filing for
bankruptcy is also increased, which augments the cost
of filing.
The basis of this legislation was
introduced during the Clinton Administration but was
vetoed even though it enjoyed better bipartisan support
at that time than when it was passed this past spring.
One of the main hang-ups at that time was the means
test. The means test which was included in the bill
passed this past spring determines who can file for
Chapter 7 or Chapter 13 bankruptcy. Chapter 13 bankruptcy
requires a payment plan be approved so the filer can
pay back a legitimate portion of their debt over a five
year period while Chapter 7 doesn't require such a payment
plan and can actually wipe out all the debts a filer
has.
The means test is specific to only
those who make less than the median income in their
state. So anyone who makes more than the median income
would still have a chance at filing for Chapter 7 which
is much more lenient on repaying debts than is Chapter
13 bankruptcy.
The means test uses discretionary
income to determine how much money the filing trustee
has to repay debts. The reasonable monthly expenses
are subtracted from their income and the remainder is
what is determined to be their discretionary income.
If the discretionary income is below $100 a month the
trustee will be allowed to file for Chapter 7. If the
discretionary income is above $166 the trustee will
have to file for Chapter 13 which requires a payment
plan to be instituted. Also the full price of car loans
taken out within two and a half years before filing
and other personal loans within one year will have to
be paid back in full, not just the value of the object
as it was under the previous law.
A Washington Post article from last
March pointed out three simple ways to beat the means
test, ranging from buying a new car, maxing out credit
card debt or just not working for a month. In each situation,
the debtor would be allowed to file for Chapter 7 bankruptcy
which eliminates most debts, in the instance of buying
a car the trustee who files would be left with just
a car payment for a new car and no other debt, a pretty
nice deal.
The means test was estimated to affect
about 20 percent of those filing for Chapter 7 bankruptcy.
In Utah in the last four quarters ending in March 2005,
nearly 12,000 non-business trustees filed for Chapter
7 bankruptcy while less than 2,000 Utahns filed for
Chapter 13, according to the U.S. Court system. An estimated
2,400 people would have to pay back more because they
would be required to file for Chapter 13 instead of
Chapter 7.
In essence, this new law should double
the number of people who file for Chapter 13 in Utah.
All the money from the extra debts that would be repaid
under the new legislation would go to the creditors
not the government or anything else. In the world of
trickle down economics and other such ideas this money
would go to lower prices in the market after time.
But who's to say what it will actually
do? A company gives someone more money than they can
pay back, the person uses more money than they can pay
back and the company ends up in the lurch because what
they thought would happen in the first place did happen.
The creditors then lobby the government to get them
more of their money back.
Obviously, the credit card companies
stand to gain more money from the people who will have
to pay things back in full. But what do the debtors
gain?
Some would say responsibility. Responsible
spending could be learned from their required credit
counseling. People would be just like in the old days
when everyone was raised during the Depression and frugality
would get you the ladies quicker than being a spendthrift.
That won't really happen though, because the creditors
themselves aren't responsible with their offerings of
credit. For instance, creditors tend to target young
adults who don't have good paying jobs with their credit
card offers yet they never mention financial responsibility
in their mailers and pre-approved offers. Responsible?
Probably not.
Even when trusted customers use their
cards the companies can't safeguard their information
as was evident when around 30 million card holders'
information was stolen this past summer from a company
in Atlanta, which was supposedly paid to protect such
information.
With this new legislation, power
has been given to the creditors but it has been taken
away from the consumers, when things could be dealt
with from the business standpoint of it. Bankruptcy
doesn't help creditors because they rarely recoup all
their money when someone files for bankruptcy. If restraint
were shown on both ends with the creditors dishing out
less free credit and the debtors using credit wisely,
things could improve. The economy would stand to gain
from the practice of financial accountability and a
better climate of solvency.
Until that time the creditors shouldn't
be granted the legislation they would like to better
collect their money from their bad decisions which were
compounded by other peoples' worse decisions.
NW
CC |
