Boiling Down The Bankruptcy Bill

Friday, April 01, 2005

With all the media frenzy covering "other" issues in recent weeks, its no wonder the Bankruptcy Abuse Prevention And Consumer Protection Act of 2005 (otherwise known as S.256) has slipped through the cracks. The administration would like to tell you this bill is needed to stop the recent spike in bankruptcy filing because, as they put it, the only people filing are irresponsible shoppers who rack up more debt than they can pay. Obviously the administration does not think highly of Walt Disney or Mark Twain. Disney went bankrupt in 1921 after starting his first animation company in Kansas City. Mr. Mark Twain filed for bankruptcy in 1894 and the experience became the inspiration for his A Connecticut Yankee in King Arthur's Court.
However most reasonable people would agree that the recent increase in bankruptcy filings may have more to do with an increase in the financial troubles of the average American. More than 1 in every 100 Americans filed for bankruptcy each year, with 50% of those filing because of medical causes and another 40% filing due to death in the family. As the law stands now, chapters 7 & 13 are the most common filing for bankruptcy. Chapter 7 is a liquidation of one's assets which are then used to payoff the debt. Any leftover debt is discharged. Chapter 13 is for individuals who wish to repay the debt they owe over a period of 3-5 years or people filing chapter 7 who are found able to pay their debt.
Now lets look at what changes bill S.256 will make to the existing bankruptcy law. A judge under the current system may find you have enough assests to cover your debt after you file chapter 7 and force you to file chapter 13.
Under the new law, discretion would no longer be the judges. A person would be held to a new "means test", based on the average total state median figures ( the census bureau's latest figures on state median range from $55,912 in Maryland to $30,072 in West Virginia). This would force almost all people into filing chapter 13, completely ignoring what a person earns vs. what a person acctually pays for rent and basic expenses.
Under the new bill a person filing chapter 13 would have to pay off the full amount of any vehicle purchase within 2 1/2 years of filing, unlike the current law. It forces a person filing to pay off the amount the car is worth when they enter court, accounting for depreciation of value.
Under the current law, the debtor and his lawyer work out a payment plan. The new proposal would force debtors to make full payments on "big ticket" items such as houses, furniture, and appliances. Debtors would make those payments directly to the lenders, while at the same time start paying the court-appointee trustee for debts to doctors, credit cards, and other unsecured creditors.
The new law also increases the length of the payment plan from the 3 year minimum now to a new 5 year minimum, effectivly killing the "clean slate" that people strive for. The new bill also requires people who file for bankruptcy to pay for credit counseling. So do the credit card companies need this protection? A quick look would suggest no. Credit card companies made over $30 billion last year alone. The loss they risk by people filing bankruptcy is offest by their interest rates. For example, a person with good credit and a low risk for filing would receive a lower interest rate, say 9%, while a person with bad credit or a high risk for filing would receive a higher interest rate, say 20%. By adjusting the rates, the credit companies have already covered the worst case scenario. Credit card companies also raise a cardholder's interest rate to between 29% or even 34% when they are late with a payment. Along with a higher interest rate for being late, cardholder's are slapped with a $29-$39 late fee. These late fees generated $7.3 billion in profit for the credit card industry in 2002. In addition to these penalties, card companies often charge "other" fees such as balance transfer, over-the-limit, and cash advance fees. These fees generated $24 billion in profit in 2002.
What credit card companies dont want to hear is the lending boom and the spike in bankruptcy filing may be their doing. Between 1993 and 2000, the amount of credit extended to the American public grew from $777 billion to almost $3 trillion. This is mostly due to credit card companies flooding vulnerable consumers such as college students, low income families, minorities, and the elderly. They must know these people are in a higher risk bracket for filing bankruptcy.
It's also worth mentioning that MBNA, America's largest lender, is also the number one overall contributor of money to the republican party.

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