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BREAKING THE BANKRUPTCY
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| by TIM HAGER, Up & Coming Weekly, March 23-29, 2005 |
March 23, 2005 |
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Gerri Detweiller's e-mail is short and succinct: "I will call. The bill stinks."
Detweiller is the author of The Ultimate Credit Handbook and the host of the internet radio show EverydayWealth Radio. What she is willing to discuss is the bankruptcy bill, which recently passed the Senate and is making its way through the House of Representatives. Crammed against Terri Schiavo, Social Security reform, and steroids in baseball, the bankruptcy bill sailed through the Senate with comparatively little fanfare. But the bill has those who work directly with bankruptcies worried.
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Supporters say the bill will cut down on costly bankruptcies that clog the system and will weed out those who want to abuse the process. Critics argue it is another case of big business - in this case credit card companies - buying legislation that is harmful to working families.
"I have a 17-year-old son who just this week got a credit card application for a $100,000 limit," said Pitt Dickey, a local bankruptcy attorney for Smith Dickey Smith Hasty & Dempster. "He has no job. He is a junior in high school. (The credit card companies) just throw these things out there. (The new bill) is going to require people to become, essentially, indentured servants to the credit card companies. The credit card companies have spent $40 million lobbying for this, that was the last figure I've seen, and they eventually got their way."
Lenders have been pushing the bill for eight years, arguing too many people with the ability to repay a portion of the money they owe are walking away from all their debts under current law.
"The major premise of the bill, that a lot of consumers are running up debts and are casually filing for bankruptcy, does not at all resonate with either the research or with my experience with consumers," Detweiller countered. "The majority of consumers I speak with want to do anything they can to avoid bankruptcy, but for a large part, aggressive credit card tactics are what is pushing them over the edge. I think specifically related to that is that many card issuers now will raise your interest rate to 20-25 percent on a whim. You don't even have to ever be late on a single payment by any creditor to see your interest rate skyrocket."
The earliest U.S. bankruptcy laws passed by Congress in 1800 allowed only a creditor to institute bankruptcy against a person who could not pay their debts. Those laws were revised in 1841 to allow a debtor to start the bankruptcy filing.
The foundation of today's bankruptcy laws were passed in 1898 and validated by the Supreme Court in 1915. The Great Depression brought the creation of Chapter 13, a program that allows debtors to pay a portion of their debts. Chapter 7, which allows debtors to wipe debt away clean, was passed in 1978.
"The best way to visualize it is that Chapter 13 is like a loan consolidation, except the court doesn't lend you money, they lend you time to repay the debt," Dickey said. "But you need to have enough income to repay the debt."
The new bill looks to make it harder for debtors to file Chapter 7, and instead push them toward Chapter 13. Under current law, a petitioner files a budget when they declare bankruptcy. A bankruptcy trustee looks at the documents and determines whether you file Chapter 13 or Chapter 7, based on whether or not your living expenses are more than your income. The administrator also has the ability to weed out those trying to abuse the system, forcing them into Chapter 13 or to not file at all.
Under the new law, the bankruptcy administrator will use a "means test" based on the income and expense standards devised by the Internal Revenue Service to deal with tax evaders. The test is less flexible than the standards imposed currently by the administrator.
"Critics have grossly mischaracterized this bill," said Edward Yingling, vice president of the American Bankers Association, in a written statement. "The fact is the bankruptcy system under this bill will remain sympathetic to individuals who, because of divorce, job loss, serious illness, or another life-altering event, have been forced into bankruptcy. That's what bankruptcy is for - to give people who need it a fresh start. But there's a significant difference between filing under Chapter 7 and Chapter 13 - just as there's a significant difference between when you should call 911 versus your local police office. Establishing criteria for filers will help ensure the system is used appropriately."
However, those critics point to two features of the means test as examples of its stringent nature: 1. It bases your income on what you've earned over the past six months, which doesn't take into consideration if you've lost your job in that time and your current income is zero. 2. The test uses figures based on average expenses to determine personal expenses. For example, it allows $1,500 per year for private school tuition expenses, a figure way below the national average.
"It is real stringent," Dickey said. "Basically it is for people who have cheated on their taxes. They are going to impose that standard on people who have lost their job, got a divorce, or all the awful things that can happen in your life. Your standard of living isn't going to be based on what it is costing you to live now. It is going to be based on what your income is, put into this IRS scale of repayment, so there is a punitive nature. Basically, it is going allow the credit card companies to cram down your budget the way the IRS crams it down when you cheat on your taxes and have to repay."
A recent study by Harvard's law and medical schools found that illness and medical bills accounted for 46 percent of filings. However, amendments to the bill proposed by Senate Democrats that would have provided loopholes for families with medical expenses were not passed. Neither were loopholes for disabled veterans, families whose bankruptcy was partly caused by an inability to collect child support and those who are caregivers for seriously ill or disabled family members, and members of the armed forces deployed overseas.
"If something happens down the road and your car breaks down, and you have to get a new car, then you have to go back to the bankruptcy court and get permission; it is going to be expensive," Dickey said. "I think the goal is to keep people from filing any kind of bankruptcy."
Adding fuel to the "us vs. them" argument were several provisions that would have hindered the wealthy and credit card companies, all of which were struck down. One would have closed asset protection trusts that allow the wealthy to shelter millions in creditor-free-zone trusts. Another would have capped credit card interest rates at 30 percent and another would have required companies to disclose on every bill the total amount a person would pay on the current balance if he or she continued to pay only the minimum required.
"When consumers are in distress and they run up a lot of debt typically they resort to making minimum payments," she said. "And they're making minimum payments and maybe paying late fees at very high interest rates. By the time they even get to bankruptcy court many of them have paid back the debt already. Mainly what they owe is interest and penalty charges. By and large the credit card companies are getting their money back."
FTCC Business and Economics Professor Walter Boyle thinks that the problem of bankruptcy is in the process of fixing itself, stating a downward trend of filings over the last six years. He pointed to a strengthening economy as the primary reason. However, he is quick to point out, that doesn't mean bankruptcy reform is unnecessary.
"Over the past five years you've seen in excess of 1.5 million bankruptcies per year in the country," he said. "That trend does not seem to be slowing. Something is needed, because there is too much of it going on. There are too many Chapter 7s going on, so some of these debts need to be paid somewhat, because it is creating a drag on business."
U.S. Representative Mike McIntyre agrees. The Congressman for the 7th district was one of several lawmakers in the Blue Dog Coalition - a collection of self-titled conservative democrats - who signed a letter to House Speaker Dennis Hastert in February promising to support the bankruptcy legislation.
McIntyre reiterated his pledge via e-mail and explained the bill will have a positive effect on all consumers.
"The real impact of the bill will be felt by those individuals who choose to manipulate the bankruptcy system by filing for Chapter 7 bankruptcy in order to avoid repaying their debts," McIntyre wrote. "Ultimately, both the cost of doing business and the costs for purchases by consumers should be lower by better bankruptcy laws which stop abuse of the current system."
If the House passes the bill without changes, it will go to the Presid. President Bush has already said he will sign the bill. If the House changes its proposal, the bill has to go to a joint Congressional committee to iron out the differences. While McIntyr pledged to support the bill, he also pledged to support any amendments that would protect his constituents.
"If amendments to benefit our military men and women or working families facing health debts are offered, I will support those amendments," he wrote. "These are the types of situations that should be allowed as exceptions so that we can help our servicemen and women and families in these circumstances."
If the bill passes and becomes law, Dickey thinks the effect on local businesses and consumers will be immediate. For starters, he expects an influx of customers looking to file. Detweiller agrees, saying she will recommend to anyone who asks to act now instead of later.
"If you've been sitting on the fence and you've been trying to get ahead, you should see a bankruptcy attorney sooner rather than later," she said. "I hate to tell someone to file bankruptcy, but my experience has been that consumers wait too long. They wait too long under the current law and they can't wait that long under the new legislation. My other bit of advice would be to do anything you can to get out from under debt. It has to become a major priority for you. The last thing you want to do is stuck under the thumb of a restrictive repayment plan for five years."
Local bankruptcy attorneys will have several adjustments to make, besides the obvious familiarization with the new law. A provision in the bill will hold attorneys accountable if their clients falsify bankruptcy documents. Under current law, the individual is responsible.
For instance, if a Fort Bragg solider hires an attorney and files for Chapter 7, but does not tell the attorney about the house he owns in California, they are both in trouble. As Dickey puts it, "I have no way of knowing if they own a house in California."
"I don't know how people are going to deal with that," he added. "It is going to become a lot more expensive to file for bankruptcy because you have a whole lot more liability. I suppose companies will grow up to do asset searches across the whole country."
"My concern is that when this becomes law they are trying to run the consumer bankruptcy attorneys out of business," Detweiller added. "Without a lawyer to represent you, under the new law, you would absolutely be foolish to file on your own."
Also affected will be credit counselors. The bill requires potential filers to see counselors before they proceed. It also has provisions for the completion of a business course before the process can end. Both courses would be paid for by the consumer.
While the classes and counseling might help in the long run, the cost of both is unreasonable for families struggling to survive, said Dickey. His clients aren't the schemers milking the system, he said, but normal people who have hit hard times.
"Most folks, they've lost a job; we're getting a lot of people out of Robeson County where they've lost jobs to Mexico," Dickey said. "They've had some time of illness and they can't work, or we get people on Social Security disability. One of the more disturbing things recently is we're getting older folks filing bankruptcy. People in their '70s. That seems to be a trend. They can't pay their bills anymore. They can't live on social security. A lot of people will use a credit card to go buy something at the Harris Teeter, and that doesn't work. People aren't real sophisticated. They get a credit card application in the mail and they start using it to buy groceries and stuff."
Boyle, who is also a credit counselor with Consumer Credit Counseling Services in Fayetteville, doesn't think the passage of the bill will have an effect on the spending habits of the daily consumer.
"Will it make a difference to the average person? I doubt it," he said. "People are still going to do whatever they do because they don't know they are in trouble until they are in trouble. ... The bottom line is that it is going to come down to personal responsibility. No one has ever put a gun to someone's head and made them charge.""
Detweiller would rather see the focus be on the credit card companies that, in her eyes, cavalierly issue cards with unreasonable interest rates. Dickey agreed, adding "I have no sympathy for them. They're pirates."
And lest one thinks it won't happen to them, Detweiller warns she has heard that before.
"Just about everyone I talk to says they didn't think bankruptcy could ever happen to them," she said. "And it can."
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©Up & Coming Magazine 2009
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