U.S. bankruptcy law overhaul needs to be overhauled

Congress and lobbyists seem to think that creating massive law changes in complex and expansive legislation will fix any and all existing problems.

In some ways, I wish Congress would take a page out of the software developer handbook and pass ?beta? legislation and legislative upgrades, rather than simply try to create a new operating system out of a bunch of old statutory parts.

Seven years ago, Congress passed a comprehensive overhaul of the bankruptcy law. The Bankruptcy Abuse Prevention and Consumer Protection Act became effective in October 2005. The law was an effort to resolve perceived abuses in the bankruptcy system instigated primarily through credit card company lobbyists. When a law passes and begins to be enforced, the real-world applications will not be clear for some time.

Despite not knowing how the new law would actually be implemented, many people filed right before the law changed. To give you an idea of the numbers, more people filed in September and half of October 2005 than in all of 2006 or 2007.

One of the changes was that a discharge in a Chapter 7 bankruptcy was limited, so cases had to be filed eight years apart. This means that the vast majority of people who rushed to file before the law changed exempted themselves from access to provisions of the new law for eight years. They still have another year to go.

As the law was implemented, unintended consequences abounded. A lot of discussion prior to the implementation of the law was about the importance of debtor education and the requirement that debtors would need to take two courses in financial literacy.

The real impact of the law was to create an entire new business of companies doing online financial literacy courses. Literally hundreds of companies were created to provide this service nationwide. Credit counseling and instruction classes became a growth industry.

The 2005 law was intended to impose significant restrictions on filing bankruptcy based on household income and ability to pay. The cut-off for requiring an analysis of the debtor?s income was the median income for the local county. The median income for a family of four in Weber County is $66,825 per year.

Most people in serious financial trouble fall well below this line and are not impacted by the law. For those above the median, the law had the strange consequence of rewarding people with lots of secured debt, versus those who had managed to avoid debt.

For example, a couple making $90,000 a year with a $2,500 house payment and two car payments under the new law would be allowed an extra deduction from their monthly income of $2,276 for the car and house payments. A couple with the same income, a $1,200 house payment and no car payments could be required to pay up to $136,560 more to their unsecured creditors than the couple with the more expensive house and nicer cars. Not exactly fair or just.

The reason for the discrepancy is that, despite the law being initiated by the credit card companies, the big winners under the new bankruptcy law were secured creditors ? home and car lenders. The law was changed so that no changes were made to most car loans and most house loans. The unintended consequence was the credit card companies, who lobbied so hard for the new legislation, got less money than they would have received otherwise.

So a note to our legislators, Congress folk, corporations and citizens who think things will be different with new legislation ? things will be different, but not maybe the way you thought they would be.

E. Kent Winward is an Ogden attorney. He can be reached at creditcorrection@gmail.com or 801-392-8200.

Source: http://www.standard.net/stories/2012/10/19/us-bankruptcy-law-overhaul-needs-be-overhauled

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