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New bankruptcy law will help restore balance

Editor's note: The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has passed the U. S. Senate and House of Representatives and is expected to be signed by the President soon. The legislation would change existing bankruptcy law to make it more difficult to qualify for bankruptcy protection. Bankrate asked columnist Steve Bucci, president of Consumer Credit Counseling Service of Southern New England, for his views on how the bankruptcy reform will affect consumers. Bucci is also founder of the Center for Personal Financial Education, an educational resource and research center devoted to increasing financial literacy. The center is a joint venture with the University of Rhode Island.

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As someone with more than a decade of experience dealing with debt issues in real-life scenarios, I feel it's important to help readers understand how the legislation may affect their ability to seek relief from their debts by filing bankruptcy.

There are a number of conflicting opinions in the media about whether the reform is hurting this group or helping that one. Given the wide variety of political motives and points of view, it can all sound very confusing. So, what does it really mean to people who have to work for a living and live with the consequences of their actions? Here's my take:

The ability to erase debts through bankruptcy is a necessary tool to help those who would otherwise not be able to get out from under their debts. More and more people have taken this route in the past two decades. Personal bankruptcies have increased from 280,000 in 1984 to 1.5 million in 2004. Since 1996, more than one million people each year have received relief from their debts through bankruptcy.

The other side to the story is that for every person who can't meet financial obligations and resorts to bankruptcy, someone else is not getting paid for a good or service provided. In many cases, one person's inability to pay causes us all to have to make up the difference in one way or another. This is part of the social and legal contract we all abide by in the United States.

The bankruptcy reform is designed to prevent abuses of the law, require more people who can afford to do so pay more of their debts and encourage other options of resolving debt problems.

That doesn't sound too bad. Unless you think others are profiting unfairly by leading you into the situation in the first place. However, many of the people who file for bankruptcy do so because of medical bills, job loss or divorce and would not be able to move forward with their financial lives without bankruptcy protection. No one is encouraging people to put themselves in these situations in order to profit from it.

Having said that, I believe bankruptcy should be a person's last resort to help solve financial problems. The positives of erasing debt through bankruptcy must outweigh the financial negatives that come with a bankruptcy on your credit record and the personal sense of failure that comes with not being able to keep your commitments and breaking your word.

For many people, when placed on the scales, the negatives far outweigh the positives and they would be better served with another solution.

The BAPCP Act is designed to make it more difficult for those who can afford other options and who may have to pay more than hoped. Here are some of the changes and how they may affect you:

  • During the 180-day period before filing for bankruptcy you must have been briefed by an approved nonprofit budget and credit counseling agency. The agency must provide information that outlines the availability of credit counseling and perform a budget analysis for you. If you can't afford to pay for the service, it will be free.
  • To qualify for Chapter 7 -- often referred to as a fresh start or a clean slate or wiping out your debts -- your income will now have to be below the median income for the same size family in your state or you will have to undergo a bankruptcy means test. The means test is complex and fairly rigid when it comes to expenses. As an example, a person is allowed $1,500 per year per child under age 18 for private education expenses regardless of the actual expense.
  • If your income is greater than the median income for the same size family in your state and you can pay at least $6,000 over five years or $100 a month, you will be required to file under Chapter 13 -- where you must repay at least a portion of your debts.
  • You will be required to pay the full amount owed on your car loan regardless of the condition of the car as opposed to paying only what your car is worth under the current bill.
  • Bankruptcy attorneys must certify their clients' financial statements to the court and will be held financially responsible if the statements are false. Due to this change, many bankruptcy attorneys may charge more for their services.
  • The filing fee has increased from $155 to $200 for Chapter 7, but decreased from $155 to $150 for Chapter 13.

So, what's the bottom line? The balance between benefit received and cost paid has shifted in recent years. The social stigma of a bankruptcy has greatly diminished. The freedom with which credit is issued has greatly increased, along with its contribution to the credit card companies bottom lines. Yet the social and economic contract between peoples in a free society relies on that balance being maintained. The changes are not perfect, but neither are they final. The market place and future legislation will react to these changes each in their own ways as they have in the past. And this is a good thing.

I don't view the bankruptcy reform as an end in itself, but only as a piece of a larger continuing event we call life. If I could add something to it, I would have liked to have seen more options for people and more education for the kids who will become the next generation of debtors, and our future.

-- Updated: April 14, 2005




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