New law isn’t helping much, but supporters are still optimistic

The Bankruptcy Abuse and Consumer Protection Act, one of many oddly-named pieces of legislation to come out of Congress in the last five years, was championed by its supporters as a way to end “rampant” abuse of the court system by people who simply didn’t want to pay their bills. According to the credit card companies, who had been trying to get this legislation passed for years, many consumers simply don’t want to pay their bills after running up huge tabs with thousands of dollars worth of frivolous spending. Studies made since the law took effect in October 2005 suggest that the law isn’t all that effective and that nearly all filers are in such dire financial straits that they cannot repay any of their debts.

Despite these findings, the bill does still have many supporters who feel that, in the long run, the bill will stop people from filing for bankruptcy on a whim. We are not sure that anyone actually does that, but listed below are some of the reasons why the law’s fans think it will help:

• Mandatory credit counseling - It is hoped that requiring debtors to undergo mandatory credit counseling prior to filing for debt relief might encourage them to seek alternatives to having their debts wiped out by the courts. The supporters of the bill are hoping that these counselors will encourage debtors to enroll in debt management plans, a scheduled repayment plan that, as it happens, benefits both the counseling agencies and the creditors financially. So far, the counselors have pointed out that 97% of their clients were not able to repay anything.
• Tough restrictions on lawyers - The attorney for the debtor is liable for the accuracy of the information contained on the documents provided by their clients. The law actually provides for penalties for the lawyers if submitted information is determined to be fraudulent. This is intended to keep shady attorneys honest or out of the business altogether.
• The means test - Those who file are now subjected to a “means test” which will require them to enroll in a five year debt repayment plan if they earn more than the median income in their state and have at least a modest amount of money left over after paying their household expenses each month. So far, most filers are failing the test and not qualifying for these plans.
• Changes in homestead exemptions - In the past, wealthy would-be filers have been able to hide their money by purchasing homes in states such as Texas or Florida, which had generous laws regarding housing. In those states, filers could not lose their homes in bankruptcy court. Those exemptions still apply, but only if the homes have been owned and lived in for at least two years.

In part two of this article, we will look at some more reasons why supporters think this law will be effective.

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