New Law
Would Make
Bankruptcy Much Tougher
by Robert K. Heady
Know
someone who's contemplating bankruptcy? Better they do it now
instead of waiting.
Reason: The tough new
rules on bankruptcy, which Congress has been debating for five
years, could become law by next year.
Just when it looked
like the House would send the bankruptcy bill speeding through
Congress, things got stalled again over, of all things, an abortion
issue. Democrats want to ensure that protesters who block access
to abortion clinics won't be able to avoid paying fines or judgments
by declaring bankruptcy. A final bill could be hammered out when
Congress returns from its August recess. If the president signs
it, the law takes effect six months later.
The new law would make
it difficult for debtors to walk away form all their bills by
going bankrupt. Instead of filing a Chapter 7, they'd be pushed
into a Chapter 13, where they must pay back a portion of what
they owe such as 25 percent.
It couldn't happen
at a worse time. Bankruptcies last year totaled 1.5 million and
are heading higher. Consumer debt is already at $1.7 trillion,
the average household owes $8,000 on credit cards, and Americans
everywhere are tapping into the equity in their homes right and
left. Stiffer bankruptcy laws will only force more of them to
borrow against their houses, IRAs and 401(k)s.
The new rules would
work like this: First, you'd contact a bankruptcy attorney to
see if you quality for a Chapter 7 under a "means test."
You'd compare your and your spouse's income over the past six
months with the median income for your state. If it's below the
median and you have an extra $100 a month left over, and owe
less than $24,000 in unsecured debt (such as credit cards), you
flunk the test.
That moves you to a
Chapter 13 and a five-year plan to repay a good hunk of what
you owe to creditors.
That's got banks, credit
card companies and finance outfits running through the streets
shouting "Hallelujah!" because, even though card issuers
have been racking up enormous profits, they're hungry for more.
To ensure they get it, they've been pouring millions of dollars
in campaign donations into the pockets of key congressional members.
Example: A July 7 story
in the Washington Post told how MBNA Corp., one of the
world's largest credit card issuers, delivered a $447,500 home-refinancing
package to Rep. Jim Moran, D-Del., "who was deep in debt,
juggling a stack of credit cards and falling behind on payments."
Naturally, Moran supports the bankruptcy reform bill.
"It's offensive
that so-called conscionable politicians want to tout the free
market system when it suits them," said Jim Caher, a Eugene-OR,
bankruptcy attorney and author of the forthcoming book Bankruptcy
for Dummies (Wiley Publishing, Inc.). "When there's
an advantage, they see no problem with Congress changing the
rules.
"Is bankruptcy
all the consumer's fault for being irresponsible? That's like
saying bypass surgery is all their fault, too, for eating fatty
foods," Caher commented. He foresees credit card companies
as becoming the next national accounting problem, especially
if they report card money as "fully-performing loans instead
of discounting them for risk."
One reader filed bankruptcy a few years ago. He lives in a trailer, doesn't own a car, and has no income except Social Security and unemployment checks. Yet, he receives about five promotional pitches a month from credit card companies.
"It's an Alice-in-Wonderland kind of bill," says David J. Light, senior managing editor of Consumer Bankruptcy News, Palm Beach Gardens, FL. "It says it's good for people, but not those who have debt."
Editor's Note: Robert Heady is the founding publisher of Bank Rate Monitor. He invites Bull & Bear reader mail on consumer money problems and solutions but cannot respond personally to all inquiries. Send e-mail to jrnl8888@aol.com, or write to P.O. Box 14875, North Palm Beach, FL 33408.
