Commentary by Kevin E. Cleary
The founders of the United States enshrined in Article I, Section 8, of the Constitution Congress’s authority to establish uniform bankruptcy laws. Perhaps ironically, that same provision enables Congress to borrow on the credit of the United States. Granted, one of the reasons U.S. currency is a cornerstone of the world market is that our government has never defaulted, but Congress has since used that borrowing power to the effect of incurring trillions of dollars of debt for years on end.
Individual taxpayers who are not endowed with Congress’s seemingly bottomless pockets often file bankruptcy in order to be protected from debts incurred by borrowing on credit, or from burdensome medical expenses. According to Steve Bucci of Bankrate.com, personal bankruptcies have increased from 280,000 in 1984 to 1.5 million in 2004. For those who had hoped to use bankruptcy as a means to avoid debt repayment, they may now find it much harder to do so.
On April 20, 2005, President Bush signed a new law, entitled the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.” Most of the new law’s provisions will not take effect until October 17, 2005, but it is expected to dramatically change the way most Americans enter federal bankruptcy.
There is a perception among opponents that this new law is a gift to insurance and credit card companies. According to attorney Joan Burda, Director of the Cleveland Homeless Legal Assistance Program, “The law is pro-creditor, anti-debtor. The idea of a fresh start, which was the cornerstone of bankruptcy law, is gone. This law is nothing more than a reward for creditors who support Republicans.”
Senator George Voinovich (R-OH), who voted for the bill, did not respond. Senator Mike DeWine (R-OH), who also voted for the bill, spoke more highly of the new legislation via email: “The bill is a compromise, so it is clearly not perfect, but it does have numerous protections for those who might be adversely affected by the legislation, and on balance it is a step in the right direction.”
Most of those protections are disclosure requirements for creditors, so as to better inform debtors of their rights; especially for reaffirmation agreements, by which debtors agree to repay otherwise dischargeable debts. According to the Congressional website, “The bill penalizes a creditor who unreasonably refuses to negotiate a pre-bankruptcy debt repayment plan with a debtor. . . It also prohibits a creditor from terminating an open end consumer credit plan simply because the consumer has not incurred finance charges on the account.”
Debtors will also be able to shelter some of their assets in certain education IRAs and retirement plans. But all potential filers for bankruptcy will be required to take credit and financial management counseling at their own expense prior to filing for bankruptcy. That provision took effect immediately upon the bill’s signing.
However, a number of local attorneys expressed unease about some of the law’s other provisions, especially one that will hold debtors’ lawyers personally liable for verifying the value of a debtor’s assets when filing for Chapter 7 bankruptcy.
“The way the new law is written people are going to find it harder to find a lawyer to represent them in filing bankruptcy. That’s because of the provision that will hold debtors’ lawyers personally liable if the debtor does not tell the truth about the value of her assets. This only applies to debtor attorneys, not creditors’ attorneys,” said Burda.
“It is going to have a chilling effect on lawyers doing pro-bono bankruptcies where there may be personal liability for the attorney,” said bankruptcy attorney Ralph Skonce.
Another major change included in the new law is the provision that will mandate means testing to determine whether or not someone is eligible to have their debts totally discharged under Chapter 7 bankruptcy. Rigorous paperwork requirements, such as three years of pay stubs and tax returns, are required to be included along with the filing. The added paperwork will add to a debtor’s expense and confusion, especially since many will be filing without representation. The means testing is not expected to actually prevent most from filing Chapter 7, since most individuals who file Chapter 7 already earn below their state’s median income level, according to moneylawyer.com.
However, misstatements and paperwork errors will result in a debtor’s attorney(if the debtor can afford an attorney)being held liable for the cost of the proceedings, as well as a possibly civil penalty fine. Many legal expert agree that the main objective of the new law is to force most debtors into filing Chapter 13 bankruptcies, which force a debtor to repay at least a portion of his or her debts, as well as to make it harder to discharge medical or credit debt. Such paperwork errors will also result in the “presumption of abuse” by the courts.
This means testing is expected to be one of the more confusing elements of the new law. According to The American Bankruptcy Institute, the means test has three main elements: “(a) a definition of current monthly income,” measuring the total income a debtor is presumed to have available; (b) a list of allowed deductions from current monthly income, for purposes of support and repayment of higher priority debt [such as child support]; and (c) defined “trigger points,” at which the income remaining after the allowed deductions would result in the presumption of abuse.”
“Current monthly income” is defined as a monthly average of all income received by the debtor (excluding Social Security benefits and certain victim payments, like being the victim of domestic terrorism) over a six-month period. The debtor is allowed certain deductions, up to limits established by the Internal Revenue Service’s living expense standards, as well as a few “Other Necessary Expenses.”
Other deductions include expenses for protection from family violence, continued costs associated with care of a nondependent family member, the actual expenses of administering a Chapter 13 plan, a $1,500 annual deduction (per minor child) for grade or high school expenses (this allowance requires special documentation), additional home energy costs, continued contributions to tax-exempt charities (up to 15% of gross income), etc.
Of main concern to most debtors, however, are the trigger points within the means testing. After calculating a debtor’s “current monthly income,” the trigger points are as follows: if a debtor has less than $100 in the calculation, they will be allowed to file Chapter 7. If the debtor has $100, the presumption of abuse (and subsequent dismissal of the Chapter 7 filing) will arise, unless the person’s debt exceeds $24,000. If a debtor has $166.66, the presumption will arise unless the debt exceeds $39,998.40. If the debtor has a “current monthly income” greater than $166.66 after the allowances, the presumption of abuse will always arise, according the American Bankruptcy Institute.
Even with the mandatory credit counseling, filers may be confused by the paperwork and filing requirements contained in the new law. This is especially disconcerting to attorneys as some feel the liabilities for debtor’s attorneys will hurt both attorneys and debtors.
“We don’t know how it’s going to affect the pro-bono bankruptcy program in Cuyahoga County. But, I suspect attorneys will be reluctant to participate because of potential liability. I think more people will file bankruptcy without a lawyer and that will wreak chaos in the court,” said Burda.
Burda also feels that this law will have a negative effect on people filing bankruptcy because of burdensome medical debts: “The Bush Administration [has also] proposed a budget that cuts back on Medicaid payments to the states. That will result in more people incurring medical expenses that they cannot pay. It seems that medical bills comprise a high percentage of debts in bankruptcy cases. Without any safety net the situation will get worse. However, the creditors are protected because of the new bankruptcy bill. . . They’re gonna get screwed. That’s the short answer.”
Copyright NEOCH, The Homeless Grapevine #70, May 2005. All Rights Reserved