First Person: Bankruptcy Today

In 450 BC, Roman debtors were cut into equal pieces and distributed to their creditors on every third market day. The 2005 Bankruptcy Abuse Prevention & Consumer Protection Act is a modern version of these mean-spirited practices, placing the interests of the credit community far above those of debt-torn Americans.  Yet, ironically, bankruptcy is still fully available to most people. In fact that availability has expanded under the amended law.

Danny Schector’s excellent article [July 30: “House of Cards”] repeats the common misapprehension that the Bankruptcy Act has “…strengthen(ed) the power of credit card companies.” It is a reasonable assumption, given that the law was bought with $112 million in credit industry donations to legislators, and passed amidst a barrage of misleading PR. (The bill’s supporters told us that bankruptcy was a safe haven for gamblers, dead-beat dads and millionaires; whereas bankruptcy has never protected these people.) But, the fact remains that the same debts can still be eliminated in bankruptcy; most possessions, vehicles and homes may be kept, and more folks now qualify for full bankruptcy relief than ever before.

Why all the confusion? The answer takes us back to the origin of bankruptcy in the US. Our Founding Fathers, uncomfortable with England’s debtors’ prisons and the colonial practice of indentured servitude, gave Congress jurisdiction over bankruptcy laws to provide a safety valve for our capital system (Article III, Section 8). In fact, Presidents Ulysses S Grant, William McKinley and even Honest Abe Lincoln filed bankruptcy. So, bankruptcy cannot be eliminated without a constitutional amendment—it can only be amended. 

Then, in the wake of congressional debates over the Reform Act, many people heard the erroneous message that bankruptcy would now be limited in scope or totally ineffective in providing relief from credit card debt, doctor bills and other debts. In addition, predatory lenders hungry to buy large blocks of poor neighborhoods, discouraged residents from filing bankruptcy by telling them that they no longer qualified, in order to buy their homes at fire-sale prices.

Moreover, we were never told the truth about who really files for bankruptcy in America, or why they file. Harvard Law professor Elizabeth Warren has collected significant data about those filers. The statistics show that families filing for bankruptcy last year received educations slightly better than average, and about 90 percent would be classified as solidly middle class. However, two out of three lost a job shortly before filing. Nearly half had medical problems and about a fifth had been recently through a divorce. Many were faced with wage garnishments that can take up to 50 percent of net wages in New Mexico. For many, bankruptcy has meant a chance to recreate a future for themselves.
Most unsecured debt can still be eliminated by filing Chapter 7 bankruptcy. The major change in the law is that a “means test” is now applied to determine whether the debtor qualifies for Chapter 7 or Chapter 13. Chapter 13 is a partial debt repayment plan administered by the court over five years. The means test has allowed more people to qualify for Chapter 7 because the “allowances” provided in the calculations are surprisingly generous. 

For example, prior to the new law, a couple with a combined gross income of $90,000 would have been counseled to avoid Chapter 7 liquidation, as it would draw a costly Motion to Dismiss from the US Trustee’s office. Now, when the means test is applied, that same couple may ascertain, before filing, whether they qualify for Chapter 7, and the odds are they will.

The misnamed Bankruptcy Abuse Prevention & Consumer Protection Act does little to “prevent abuse” and has done nothing to provide “consumer protection.” Congress rejected humane amendments that would have made it easier for the sick, elderly and military veterans to file.  They also rejected an amendment that would have placed a 30 percent ceiling on credit card interest rates—rates that would embarrass any self-respecting loan shark. Another rejected amendment would have halted the collection of loans to military members (who are now filing bankruptcy at four times the rate of civilians) when the loan’s interest rate exceeded 36 percent!  Here in New Mexico, our legislators have similarly rejected attempts to cap interest rates. The Reform Act did nothing to curb credit card abuses, such as setting due dates on Sunday thereby increasing the odds of the payment arriving late—then raising the interest rate from 7 percent to 30 percent because of the late payment.

The primary sponsor of the bill, US Sen. Charles E Grassley, R-Iowa, actively opposes abortion and same-sex marriage on biblical grounds, yet believes that the Bible’s condemnation of usury doesn’t apply here. (The Old Testament also instructs us to forgive debt after seven years.)  

On the bright side, US Sen. Barack Obama, D-Ill., has called for revamping the bankruptcy code to provide greater protection for seniors by increasing their homestead exemption. He also proposes a simplified bankruptcy for military personnel, which excludes the means test.

In my experience, and contrary to prevailing myths, no one wants to file for bankruptcy.  But, when one is faced with missing a rent payment and possible homelessness due to a wage garnishment, or faced with either paying astronomical interest rates or feeding the family, bankruptcy is a viable and humane way to cope with life in an increasingly uncertain economic environment.