Tuesday, April 26, 2005

Controversial Bankruptcy Bill Passed

April 13(26), 2005
One week ago tomorrow, President Bush signed into law a new bankruptcy bill that will severely limit how citizens can clear their debts. There are two different kinds of bankruptcies most commonly filed for in the United States, Chapter 7 and Chapter 13. Chapter 7 bankruptcy (which accounts for over 70% of all filings) allows for non-state exempted assets to be liquidated and distributed equitably among one’s creditors, who are then legally obligated to drop the remaining debt. In this way, credit card companies lose billions of dollars every year, a figure that rests primarily on the shoulders of the risky spenders whom those corporations so aggressively target. A number of legislators are upset that, after using tactical practices designed to put people in their debt, the credit card companies themselves are now suffering financial losses.
Chapter 13 bankruptcy requires the filer to pay back their debts over a period of five years. Under the new law, most people will have to file for Chapter 13 bankruptcy than will be allowed to file for Chapter 7 bankruptcy.
Democrats say that this is wrong, because credit card companies often deliberately create debt through incentives to younger customers who aren’t streetwise enough to resist the urge to spend. For many in deep poverty, Chapter 13 bankruptcy would be inadequate, only prolonging financial ruin instead of erasing it. While credit card companies will see roughly $1 billion in profits from the legislation, very few average people will be positively affected.
The new law will subject filers to a two-part income test. Exempting completely essential expenses like rent and food, the government will determine if you can afford to pay 25% of your non-essential income towards debt. After that, your income is compared to your state’s median income. If one’s income is above the median, they will be required to file for Chapter 13 bankruptcy and will not have the option of using the Chapter 7 provisions. For many, this will result with a situation in which they barely have enough to put food on the table every week, a miserable way to spend five years.
The “median income,” clause seems practical, but first looks are deceiving. What if you live in a state like, say, West Virginia, where the average income is extremely low? You could easily make more money than the median person but still live in relative poverty. The law also reduces the power of the courts (a cornerstone of the Republican agenda, anyway). Before, a court had large influence in determining which type of bankruptcy a person could file under, and often took specific circumstances into account. Now, no such option exists. In addition, the exemption that states are allowed to provide for assets had been sharply curtailed. Because of the more complicated regulations and restrictions, bankruptcy attorneys are likely to charge more. In the end, all that this does is create a good deal of both headache and heartache for people already going through a rough time. While the idea of holding people responsible for their debt (if they are abusing the system) is a good one, it needs to be perfected). Specifically individual predicaments really ought to be considered. Without this, the bankruptcy system can be neither efficient nor judicious.


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