How Are Bankruptcies Different
Under the New Law?
Bankruptcy cases filed under the new law are different in a number of ways. The purpose of the new law was to make financially distressed consumers and small business owners provide much more documentation and jump through many more “hoops” in order to receive bankruptcy relief. In addition, the purpose of the law was to reduce the overall benefit of filing a bankruptcy. Both of those objectives are achieved by the new law.
Lobbyists and legislators who favored the new law claimed that it would not hurt low- and middle-income Americans. They claimed that their goal was to stop the “abuses” they argued were so prevalent in the bankruptcy system – the bankruptcy debtor who was fully capable of paying his/her bills, but just used bankruptcy as a “financial planning tool.” The credit card industry funded one billboard in the Washington DC area (obviously directed at members of Congress) that showed a bankruptcy debtor casually enjoying his luxury motorboat.
Under the older bankruptcy law, that
boating bankruptcy debtor had been hard to find. Contrary to complaints by supporters of the new law, since the early 1980s consumer bankruptcy debtors have had to submit budgets showing they cannot afford to repay their debts. Few debtors could afford a luxury motorboat and still be able to convince the trustee and judge that they could not afford to pay their debts. Debtors with primarily non-consumer debts, such as business or tax debts, were not subject to the ability to pay test like consumers were – so maybe the boating bankruptcy debtor was a business owner or had tax debts. It is unlikely he was a consumer debtor subject to the budget requirement, who is typical of over 95% of all bankruptcy cases files.
Now, under the new law, this preferential treatment for business or tax debtors remains much the same. These debtors are often the “high-rollers” Congress claimed to be cracking down on – but, they still are not subject to the “Means Test.” Only consumer debtors are subject to the Means Test.
Supporters of the new law claim that low- and middle-income debtors are not hurt by the law because their income and expense calculations allows them to be exempt from or to pass the Means Test. Regardless of the Means Test, many obstacles are presented to the consumer debtor before getting to that point.
The list of new hurdles includes:
- Wasting time and money being “counseled” by a credit counselor when the people simply don’t have enough income to pay their ongoing living expenses
- Producing copies of tax returns
- Producing a collection of paycheck stubs from the last seven months
- Producing documentation about all other sources of income received in the last six months
- Wasting time and money on financial management education, when the cause of the financial problem was job loss, injury, illness, etc.
None of this documentation is necessary to confirm the person’s true financial problems in every single case. Under the old bankruptcy law, trustees (representatives of the bankruptcy court) always were able to require the debtor to produce the necessary documentation if there are questions about the debtor’s finances that have not been addressed sufficiently in the filed documents.
How are bankruptcies different for people now?
- As mentioned, people will be required to provide much more paperwork in order to file the case initially.
- It will be almost impossible for people to be able to represent themselves in a bankruptcy and will normally need the assistance of a bankruptcy attorney.
- Debtors will have to pay bankruptcy attorneys more money to file the case, because the attorney will have to do much more work in every case. However, in Chapter 13 cases, most of the attorneys fees can be included in a monthly plan payment even when most of the debts are being wiped out.
- Debtors will not have a greater ability to pay their creditors, just because Congress thinks they should.
- Debtors may decide to surrender more cars with loans on them, because they may not be able to afford the payments required under the new law.
- Debtors who owe child support and don’t have the money to hire an attorney to reduce the ongoing support payments may not be able to obtain bankruptcy relief, particularly under Chapter 13.
- More debtors will file Chapter 7 cases and fewer will file Chapter 13 cases.
How are bankruptcies different for creditors now?
- Credit card companies will be disappointed to find that they will get significantly less money from bankrupt debtors, because fewer debtors will pay a portion of their credit card debt through Chapter 13 cases.
- Car lenders will start “eating steel” by taking back the cars which the bankruptcy debtors will no longer want to keep.
- Taxing agencies will not receive as much of a benefit in having Chapter 13 plans act as court-enforced installment agreements in exchange for discharging older years, which are largely uncollectible anyway.
How is the government’s bankruptcy bureaucracy different now?
- Trustees will be overburdened with managing overwhelming quantities of documentation lacking any real significance in the cases.
- Trustees will be required to protect the debtor’s financial privacy, but will be required to collect sensitive data.
- Bankruptcy courts and federal appellate courts will be burdened with a flood of litigation from creditors, debtors and trustees – all having to start from scratch to develop a body of case law that will interpret and apply the new confusing, ambiguous, and frequently self-contradicting law.
- The federal government bureaucracy (US Trustee Program - a division of the US Department of Justice) will likely increase substantially in staff, due to a substantial increase in funding under the new law.
Times will be more difficult for all participants in the bankruptcy process. The new burdens will be significant and the benefits will be virtually non-existent. But then, that is the quality of legislation that money can, and does, buy in Washington DC.
(c) Norma Hammes 2006
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