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Contents
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Bankruptcy Law - Will it Protect You?
New changes in bankruptcy law harm more than help
Recent changes in Federal bankruptcy law claim to offer protection for consumers. What sort of protection? How does the law help? Does it help at all, or is it just a smokescreen?
Continued below
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The Bankruptcy Abuse and Consumer Protection Act
This cleverly named bill was passed into law by both houses of Congress in April 2005 and enthusiastically signed into law by President Bush shortly thereafter. This sweeping piece of legislation brought forth the greatest changes in Federal debt law in more than twenty five years. The bill, set to take effect in October 2005, claims, through its very name, to offer “consumer protection.” Does it? How will this bill “protect” consumers, and what, exactly, is it supposed to protect them from?
This legislation was proposed to solve a problem that doesn’t really exist - the so-called “bankruptcy of convenience.” Proponents of the bill claim that current bankruptcy law is too generous, and that it allows people who are irresponsible shoppers or gamblers to intentionally run up mountains of debt with that they have no intention of repaying. They correctly note that the cost of personal bankruptcy in the United States costs creditors billions of dollars per year, and that those costs are passed on to consumers who must foot the bill through higher interest rates and fees. Legislators claim that by making it harder for these scofflaws to avoid paying their debts, the credit card companies will save billions of dollars per year, and they will then be able to pass the savings on to consumers.
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The key provisions of the bill include the following:
- Debtors considering filing for bankruptcy must first pass a “means test” which will determine if they qualify for a traditional Chapter 7 filing. Under Chapter 7 of the Federal code, most debts can be wiped away by the courts, leaving the debtor free to make a fresh start. Under the new law, most filers will have to file under Chapter 13 instead, which requires that the court establish a repayment plan.
- The new law has no provisions for problem debt incurred by job loss, illness, or even military service, despite overwhelming evidence that demonstrates these to be the cause of most bankruptcy filings.
- Attorneys will now be held liable for the factuality of documents they file on behalf of their clients. This “feature” of the bill will make it more difficult for most consumers to find an attorney who is willing to handle their case in court. Those attorneys who specialize in bankruptcy law will probably increase their fees dramatically in order to offset the additional risk. Those lawyers who only occasionally handle such cases will probably discontinue the practice.
The bottom line is that it will be harder for those with problem debt caused by job loss, illness, or other traumatic events to clear their debts through bankruptcy. Those who do file will find that it takes more time and costs more money to file and that the help of competent attorneys will be harder to obtain. The only possible benefit for consumers will be a drop in interest rates and fees associated with credit card use, and even then, only if the credit card companies choose to lower their rates. Given how profitable the credit card industry has been in recent years, it seems unlikely that they will do so. Should the companies elect to keep their increased profits, the “protection” afforded consumers by this new legislation will amount to nothing.
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