A Few Points To Ponder On Bankruptcy Law
The previous bouts of economic recessions brought many people to their knees, metaphorically speaking, with the accumulated debts due to unemployment and closure of many businesses. This was evident in the number of bankruptcies filed in the years before the reform legislation passed in US Congress on April 20, 2005 which took effect the following October 17, 2005. Can all these bankruptcies be really results of economic backlashes or were there abuses of the law? To find out, Congress conducted studies and hearings that revealed that the surge in the filings was instigated by people taking it as a first recourse before trying other solutions. This point to wide scale abuses of the law. Thus, the reforms were intended to curb the abuses of the old Bankruptcy Law of 1978.
In its place is the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) signed by President Bush and administered by The United States Trustee Program. This is the component of the US Department of Justice that is tasked to protect its integrity through enforcing the laws by overseeing and litigating the cases. This Act empowered this arm of US-DOJ with additional responsibilities and powers; the most critical of which are:
1. Implementation of ‘the means test’ that determines if the disposable income qualifies the filer under Chapter 7 (liquidation of assets) or 13 (repayment plan with 5 years) of the new Bankruptcy Law of 2005.
2. Approving and certifying counseling agencies or entities seeking accreditation for purposes of providing credit counseling to filers of bankruptcy and providing financial education before the discharge or wiping out of debts.
3. Overseeing and conducting spot random checks and targeted audits to validate accuracy of the bankruptcy documents of the filer.
4. Supervising of cases for small business reorganization under Chapter 11.
This act was able to end the abuse and fraud practiced by a huge number of borrowers for quite a time costing credit card issuers, banks and all the consumers billions of dollars. In the old law, filing for bankruptcy can ruin the credit for the next two or three years. This is relatively a negligible price to pay after borrowing tens of thousands of dollars or more. Many can get around the law by having all the credit lines open and used or abused of one spouse while keeping the credit report of the other spouse squeaky clean that can be used after bankruptcy. The means test of under Chapter 7 or 13 of the new law made filing difficult. Filing for Chapter 7 entails liquidating the assets of the borrower with the proceeds being distributed among the creditors. Even with liquidation of the assets, the filer still needs to be eligible for it by passing certain stringent requirements such as the means test. Meanwhile, those who will apply for Chapter 13 can keep their assets but need to submit to a repayment of the debts within 5 years.
The extra powers and tools of the U.S. Trustee Program reinforced its ability to defeat bankruptcy fraud and abuse. These strengthened the integrity of the bankruptcy system leading to consumer protection. Conversely, there are certain sectors who believe that the revisions made in the 2005 bankruptcy abuse reform are now to be blamed in the surge in subprime foreclosures that started happening following the passage of the Act. Prior to 2005, over-indebted mortgagors could write off their debts easily through bankruptcy. The means test and other requirements are now making this avenue a last recourse rather than the first one unlike before 2005.
Bankruptcy mars one’s credit report for 7 to 10 years (Chapter 13 and 7 respectively) and carries with it a stigma that affects one’s disposition and psyche. These are not small matters to contend, much less live with for the rest of any person’s life. Yet, it can be a way out of an economic dilemma and a second shot for a decent life. In the face of its new provisions that prevent abuses and make it difficult for filers to get through, one can’t help but wonder why the continued surge in the number of bankruptcies. Is the economic recession really taking its toll or is abuse just taking another form?
