BANKRUPTCY REFORM LIFTS BASIC PROTECTIONS

By Diane M. Grassi

Lately it seems that important legislation which directly effects the American people is getting little coverage in the press with the broadcast and print media in addition to our government all responsible. Enactment of the biggest legislative reform in 27 years of the United States Bankruptcy Code was ratified by the House of Representatives on April 14, 2005 following its passage in the Senate in March of this year. It was enthusiastically signed by President Bush on April 20, 2005.

Missing from coverage of the Bankruptcy Reform Act of 2005 are reports on the benefits deleted which gave basic protections for those filing for personal bankruptcy with limited assets. Instead, financial institutions, corporations and millionaires will continue to enjoy asset protection trusts which ensure them a fresh start while they are able to keep unlimited amounts of revenue or cash out-of-reach of the courts.

Since 1898 U.S. bankruptcy law has afforded Americans a so-called fresh start after extinguishing their debts. With the new legislation most filers will now be forced into Chapter 13, or reorganization, requiring them to pay back their debts over a period of 5 years, as opposed to Chapter 7 which would wipe their slate clean.

But a lot has changed in the past 27 years when a restructuring of the law would then have been more of a viable option. Not disclosed by the press or by our legislators are the details of the new law which does not take into account that 95% of bankruptcy claims involve a combination of catastrophic illness, disability, identity theft, job loss, divorce or the caregiving to loved ones. In fact there was no such term as ‘identity theft’ 27 years ago, which is a constant threat to any of us on any given day in the electronic world in which we now live.

Basically the way the new law works is that every filer must now be means-tested based upon their income of the prior 6 months regardless of the filer’s ability to pay. If the filer’s income is at or above the median income of the state in which they reside they would be forced into a payment plan now extended over a five year period, with no cap on interest rates for lenders who extend credit, now at a high 30% APR. If the filer owns a home, the homestead exemption would no longer apply if the home is purchased within 1,215 days of filing. Any interest in the home greater than $125,000.00 would not be protected. If a debtor shows that they can make a minimum payment of $100.00 a month toward debts over 5 years, they will be shifted to Chapter 13 rather than to Chapter 7 which in the past would have let them fully recover.

Much misunderstood in the present day is the changed face of most individual filers. So-called deadbeat abusers of bankruptcy filings which Congress would like us to believe are the majority, make up approximately 1-3% of total claims. A recent study by the Harvard Law and Medical Schools shows that more than half of Chapter 7 bankruptcy filings are due to a serious illness or disabling injury and their related medical costs. 27 years ago we did not have the astronomical medical costs of today which can easily land a steadily employed individual even with medical insurance into serious debt. If the illness or injury is permanent or chronic and followed by job loss the person or family may have no choice but to file for bankruptcy. As little has been done in the way of curtailing medical and pharmaceutical costs spiraling out of control over the past decade, many have no other option, especially if many of those costs were additionally applied to credit cards.

The credit card industry, largely responsible for wording much of the language in the new legislation, has much to gain with the new law in extending its $130 billion yearly profit in 2004 resulting from interest and late fees collected from credit card users. And the 10-30% interest rates which card companies presently charge customers precisely to protect themselves from riskier users who default on their credit, will not only be able to continue to collect interest with no future caps on interest rates but will get a bail-out from the U.S. Bankruptcy Court as well.

The most egregious aspect of the new legislation is that it punishes the most vulnerable who need protection. The new law eliminates the requirement of judges to evaluate each case in an effort to discern between the deadbeat and the seriously ill or the breadwinner laid off in a volatile job market. This takes the onus away from the courts and returns it to the filer. Far different from 27 years ago, the present job market routinely suffers from downsizing, outsourcing, displacement and offshoring with low-level paying jobs absorbed by the underground economy. One could rely on their job or educational skills in the past, but today there are no such guarantees.

However, this is not a call for the dissolution of bankruptcy laws, but rather for the courts and the Congress to realize the harm the reformed legislation imposes upon those most at risk in ever recovering. No one wants people who deliberately or irresponsibly live beyond their means to get a free pass. But the additional proposed amendments to the new bill, all of which were dismissed by the Congress, give insight into the types of provisions which would have preserved the rights of the individual filer: limiting the homestead exemption for the disabled or elderly; protecting service members and veterans from means-testing and exempting their property; protecting employees and retirees from corporate practices depriving them of their earnings and retirement savings when businesses file for bankruptcy; cutting off trusts and loopholes for millionaires; exempting debtors from means-testing if debt is caused by identity theft; limiting amount of interest on extension of credit to 30%; exempting those in debt due to serious medical problems from means-testing; requiring credit card issuers to disclose all hidden fees and consequences of making minimum monthly payments to consumers.

All of the stricken amendments would not have limited the extent of the law but would have extended much needed help for those most in need, who either no longer can earn an income or have one with their only asset being a home in which they live. But it is apparent that our lawmakers have a myopic view of this misguided legislation, and could not be bothered by reading it prior to their decisions, as it was a couple of hundred pages. It is also no coincidence that financial institutions now account for the largest lobby in Washington, D.C., surpassing the oil and gas industries. And partisanship can no longer be blamed for this flawed legislation, as there was surprising bipartisanship support on the Hill with one third of those in favor of it representing Democrats in a Republican controlled Congress.

Most importantly it represents yet another stab in the proverbial backs of law abiding and honest individuals who wind up in a catastrophic situation due to no fault of their own. Rather than punishing the abusers the law punishes all only to reward the financial institutions and corporations. Profiting off of the backs of the fallen who have landed on hard times is neither honest nor decent. It once again displays a Congress which can only tackle issues in black and white. And it appears that Congress no longer has the will to fight for its constituency or in saving face in light of its imprudent decisions.