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.
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
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
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
- 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.