Tougher personal bankruptcy law looms
consumers forced into bankruptcy will face even more obstacles to recovery if
a bill that died in the 2002 session of Congress is revived, consumer groups
The bill, sponsored by Sen. Chuck Grassley, R-Iowa, and vigorously
supported by the finance industry, would create a host of new requirements for
consumers who want to declare bankruptcy.
Proponents of the bill say the requirements are necessary and
long overdue to prevent abuse. Opponents say the bill is grossly weighted in
favor of creditors and punishes people in debt through no fault of their own.
More than 1.5 million Americans filed for personal bankruptcy
during the fiscal year that ended in September, according to statistics from
the Administrative Office of the U.S. Courts. Of those, more than 1 million
filed for Chapter 7, the form that wipes out most debts.
Under the new proposal, those filers would have to pass a test
to qualify. New bankruptcy regulations would measure the debtor's disposable
income to determine the money available to pay creditors with an emphasis on
earning potential, rather than actual income. The new system also would limit
a filer to housing, transportation and food allowances based on regional norms.
Proponents say the changes would update the bankruptcy code and
"We maintain that there is a lot in this bill that is good
for consumers," says Gary J. Kohn, vice president of legislative affairs
for the Credit Union National Association, an industry organization that was
part of the coalition behind the bill.
Kohn and other proponents claim the new rules would benefit consumers
in several ways, including requiring credit card companies to furnish information
to consumers on how long it would take to repay their debts with minimum payments.
And consumers considering bankruptcy would be required to go
through credit counseling.
Bankruptcy bill imbalance?
Critics charge that if this bill becomes law, it will slow the bankruptcy
process and make it more complicated and more expensive, effectively removing
it as an option for many of those who truly need it.
"This particular bill would do more harm than good,"
says David Butler, spokesman for Consumers Union, the nonprofit group that publishes
Consumer Reports. "It's so heavily weighted against debtors and toward
And with a soft economy and many people out of work, "The
timing of the bill couldn't be worse."
Both sides of the debate admit that the bankruptcy system needs
to be updated. But consumer groups contend that the current bill is not the
right tool for the job.
"While it may be intended to solve some small problems, it
may create several large ones," says David A. Greer, vice chair of the
American Bar Association business section's consumer bankruptcy committee.
Consumer advocates worry that in trying to eliminate abuse, policy
makers are throwing out the baby with the bath water.
"A bill that was originally aimed at preventing bankruptcy
abuse has turned into a bill that would make it difficult for many other people
to [declare bankruptcy]," says Butler.
Greer says that filing under current law is almost instantaneous,
which is a boon to many consumers who file at the last possible minute to hang
on to their homes.
The new bankruptcy process
The proposed system would add a few more steps.
First, individuals would have to attend credit counseling before
they could file. Filers also would be required to present much more detailed
paperwork to the court, including several years of tax returns. And their attorneys
would be required to certify that the information was correct.
To qualify for a Chapter 7 bankruptcy, which under current law
wipes out most debts, filers with more than a median income would have to prove
they couldn't pay back either 25 percent of their unsecured debt over five years
or $167 a month, whichever is less, says Henry J. Sommer, author of "Consumer
Bankruptcy: the Complete Guide to Chapter 7 and Chapter 13 Personal Bankruptcy."
But here's the hitch, according to consumer advocates, the test
looks at the amount of money an individual should be making and spending, not
his or her actual income and expenses.
The new regulations would average the income for the past six
months. This would be a particular hardship to people who turn to bankruptcy
after losing a job, say consumer advocates.
"It may be assumed [they] have money left to pay debts that
really isn't there," says Celia Wexler, director of research for Common
Cause, a nonprofit organization that studies campaign reform.
Disposable income would be calculated based on regional norms
for housing, transportation and food costs.
"The means test formula uses numbers that may not be accurate
in terms of a debtor's real circumstances," says Samuel J. Gerdano, executive
director of the American Bankruptcy Institute.
Proponents of the bill say that anyone with extraordinary circumstances,
such as a chronically sick or handicapped child or an elderly parent in the
home, would have some leeway. But consumer advocates counter that the way the
bill is written, there isn't that much room to give.
In addition, they say the changes, which are backed by a coalition
of financial services industry groups, shift the leverage in bankruptcy to creditors.
"It's a 450-page bill and it's very creditor-oriented,"
says Gerdano. "Whatever type of creditor you are, chances are there is
something in this bill that favors you over the debtor. It changes the leverage
between creditors and debtors."
Sommer also believes that the bill will open debtors up to coercion
"[Under the proposed legislation] if you spend $500 on luxury
items in the 60 days [prior to filing] bankruptcy, you will be presumed to have
committed fraud," says Sommer, a Philadelphia attorney.
Defending the charges, even if they are false, would cost thousands,
he says. The end result? Many consumers would be forced into repayment agreements
that negate the point of their bankruptcy.
And the credit counseling requirement could create a nightmare
for credit counselors, said Lydia Sermons-Ward, vice president of marketing
and communications for the National Foundation for Credit Counseling, the nonprofit
umbrella organization behind the nation's largest network of nonprofit credit
"It will push millions [of people] through the door,"
The bill died in Congress in mid-November largely because of an
abortion protest-provision that had been attached to it. Whether the measure
would be on the bill if it came back is open to debate. The provision, known
as the Schumer amendment, added by Sen. Charles Schumer, D-N.Y., aimed to prevent
abortion protesters from discharging protest-related penalties through bankruptcy.
The way the bill is currently written, the new regulations would
take effect six months after it was adopted. In that period, both sides predict,
filings would skyrocket.
"It's a virtual certainty that it will come back," said
Travis B. Plunkett, legislative director for the Consumer Federation of America,
a nonprofit consumer group. "I don't think the sponsors of the bill will
just drop it."
-- Posted: Jan. 9, 2003