Early last March, the Senate passed a Bankruptcy Reform bill. The House is expected to do the same in the very near future, after which it is likely that President Bush will sign it into law.
The Bankruptcy Reform bill has been a long time coming. It's supporters, the banking and credit card industry, have been pushing for tighter restrictions on bankruptcy filers for the past eight years. Until recently, the bill met with sufficient opposition to be defeated. While supporters of the bill cry for tougher laws to discourage abuse of the system, opponents to the bill are concerned that proposed changes to bankruptcy laws will unjustly deprive honest, hardworking American families to get needed relief from devastating financial crisis.
President Clinton, during his term, refused to sign similar reform when it came across his desk. The current administration is supportive of bankruptcy reform and it is inevitable that President Bush will soon sign the bankruptcy bill into law.
When the new bankruptcy law is passed the process for bankruptcy filers will become substantially more difficult. In particular, those debtors seeking to file for Chapter 7, the most basic ad common form of bankruptcy, will be faced with a number of new requirements.
To begin with, consumers seeking to file will first have to attend mandatory "debt counseling." This may sound like a very reasonable requirement, however, in my experience, I am continually receiving reports from my clients about their troubling experiences with these "credit counseling" agencies.
It is no secret that the credit-counseling industry is plagued with "consumer complaints about excessive fees, pressure tactics, nonexistent counseling and education, promised results that never come about, ruined credit ratings, poor service in many cases clients being left in worse debt than before they initiated their debt management plan."
(Statement of Senator Norm Coleman, Hearing of the Senate Permanent Commission on Investigations, [March 24, 2004.]).
I personally have spoken with many mortgage brokers and investment professionals who have unanimously agreed that some of the worst credit ratings they have ever seen are from consumers who have been through credit counseling.
When credit counseling becomes a mandatory pre-requisite to bankruptcy, consumers will be put at the mercy of an industry where according to a recent Senate investigation many of the "counselors" are seeking to profit from the misfortune of their customers. In addition to mandatory credit counseling there will be many more hoops for bankruptcy filers to jump through once the new laws are in place.
At the center of the new bankruptcy law is a so-called "means-test" which denies Chapter 7 access to those debtors who might be able to repay a portion of their debts over a period of years. Although it is certainly reasonable that anyone with the economic ability to repay their debts should not be allowed to walk away from their creditors by filing for bankruptcy, there are already laws in effect currently that are designed to deal with this type of abuse on a case-by-case basis.
In contrast, the new "means-test" will be an all-encompassing formulaic application of income and expense standards derived from the Internal Revenue Service. Application of these rigid standards will inevitably cause some unfair results due to there inflexibility. To give just one example of its inflexibility, the means-test limits private or parochial school tuition expenses to $1,500.00 per year. According to the National Center for Educational Statistics, even in 1993, $1,500.00 would not have covered the average tuition for any category of parochial school (except Seventh Day Adventists and Wisconsin Synod Lutherans. Clearly, the result of this bill will be to force many families needing to file bankruptcy into removing their child from private school, despite the fact that it may be an integral practice associated with their religious beliefs.
The new bankruptcy law contains other provisions which will significantly limit the struggling consumers ability to receive bankruptcy relief, for example, creditors will have increased abilities to contest bankruptcy filings which will likely swamp the bankruptcy court with lengthy, often unnecessary hearings, driving up the costs of bankruptcy filing. Debtors will lose the ability to eliminate certain types of secured debt, for instance, today's law allows a debtor in certain circumstances to reduce an auto loan to the value of the vehicle. This "strip down" provision will no longer be available after Bankruptcy Reform.
In summary, the ability to file bankruptcy and receive a fresh start provides crucial aid to American families overwhelmed by financial problems. According to statistics compiled by the American Bankruptcy Institute and my own personal experience with hundreds of clients, for the most part, these families are not driven to bankruptcy by a desire to shrug off their responsibilities or cheat the system; but moreover, they are honest hardworking individuals who have fallen victim to the economic consequences of a failing economy, job losses, divorce, and serious illnesses. The cumulative effect of the new bankruptcy laws will be to deprive these individuals of much needed relief, while putting a few million more dollars in the hands of the credit card industry.
The new bankruptcy laws will go into effect 180 days after the President signs them into law. Anyone considering bankruptcy would be well advised to consult a qualified, experienced bankruptcy attorney as soon as possible, preferably before these laws take effect.
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