Bankruptcies Hit 20-Year Low Under Law Sponsored by Creditors

Corporate Upper Class
Bankruptcies Hit 20-Year Low Under Law Sponsored by Creditors
By Diaka Camara
Oct 3, 2006, 20:23

The total number of U.S. bankruptcies fell by almost 70 percent during the first six months of 2006, representing a 20-year record low, according to federal court data.

The Administrative Office of the U.S. Courts said filings for the period from Jan. 1 to June 30, 2006, fell to 272,604 from 868,482, for filings for the same period in 2005. Under a law sponsored by credit and banking lobbyists and signed by President Bush on April 20, 2005, the number of bankruptcy filings were the lowest since 1986 for a first-half calendar year.

The Bankruptcy Abuse Prevention and Consumer Protection Act revised the 1978 bankruptcy reform act. The 2005 revision made five major changes to the 1978 bankruptcy law: It established a proof of income test; it made eligibility for Chapter Seven filing stricter; it changed the tax rates; and it mandated credit counseling and financial management education.

Those who file for Chapter Seven bankruptcy are allowed to keep exempt property, such as tools, clothes, a car and household furnishings. Other assets – real property (like a mobile home), personal property, pensions and life insurance policies with loan value in accrued dividends up to $9,000 – may be exempted. Under U.S. Code 11, Section 522, a debtor may opt for the federal exemption guidelines in favor of state exemptions. The options for exempted property vary from state to state.

A person’s remaining assets may be liquidated to repay creditors. Child support and school loans have to be repaid. But many types of unsecured debt (debts for which collateral has not been given) are cancelled.

Under the Chapter 13 filing or reorganization of 2005, a debtor proposes a plan to re-pay creditors over a five year period. During the period, creditors cannot attempt to collect on the debtor’s previously incurred debt, except through the bankruptcy court.

According to attorneys specializing in bankruptcy law, the legislation was enacted after years of lobbying efforts by banks and lending institutions. The Coalition for Responsible Bankruptcy Laws, a lobbying group for major financial and credit institutions, pushed for the Senate version of the 2005 law. The coalition represents Bank of America, Capital One, Citigroup Inc, JP Morgan Chase & Co., Washington Mutual, American Bankers Association, Morgan Stanley, Visa, MasterCard, MBNA and the U.S Chamber of Commerce. In a letter to J. Dennis Hastert, the speaker of the House of Representatives, the coalition wrote, “S.256 is a genuine, comprehensive reform of a system that has no incentive to change and Congress is right to act.”

A poll showing public support for changes in the law was released in 2004. In the survey by Penn, Schoen & Berland Associates, Inc. – a Washington, D.C., polling firm – 67 percent of the those interviewed in November 2004 agreed that filing for personal bankruptcy was too easy, and 82 percent were in favor of an income test for those who file for bankruptcy. The survey was based on 1,601 online interviews with presidential election voters. Penn, Schoen & Berland, now owned by WPP Group, London, famously and incorrectly predicted the loss of Hugo Chavez, based on an exit poll during the 2004 presidential elections in Venezuela.

The bill received wide Republican support. Sen. Orrin G. Hatch of Utah said the law would reduce the number of fraudulent and abusive filings and help educate consumers, “This bill will make it tougher for those who have been abusing bankruptcy laws as a way to unfairly avoid their debts.”

The means test, created in Section 707(b)(2), establishes a presumption of abuse if the debtor’s income is higher than the median income in the debtor’s state. The median state income is to be calculated from the Bureau of the Census reports in the most recent years in (101) (39A). The debtor’s income is calculated as a monthly average of all the income received by the individual in the six months prior to filing for bankruptcy. It includes regular contributions to household expenses made by other persons but excludes Social Security benefits.

According to Barbara Rogers, a Texas lawyer practicing bankruptcy law for the past 15 years, applicants seeking to file under Chapter Seven must meet the eligibility requirement a means test. If current monthly income above the median income in the state and applicants can afford to pay $100 per month toward their debts, they must file under Chapter 13.

Before last year, Rogers says, anyone could file for bankruptcy under Chapter seven. The main distinction between Chapters Seven and 13 is the debtors enter into a three-to-five year repayment plan. Debtors must pay a fixed amount of money to creditors each month, specifically including unsecured debts – that is, credit card debt as opposed to mortgage or car loans since the equity built up from previous repayment constitutes collateral.

According to the American Bankruptcy Institute, the type of consumer bankruptcies filed in the first half of 2006 shifted considerably from the first half of 2005. Chapter 13 filings represented 41.2 percent of all consumer filings in first six months of 2006 up from 24.2 percent during the same period in 2005.

Conversely, Chapter Seven bankruptcies fell to 58.8 percent of total consumer filings in early 2006 from 75.8 percent in early 2005. The total of all bankruptcy filings for rolling 12-month periods has declined since the law came into effect. The 1,484,570 total filings during the 12-month period ending June 30, 2006, represent a 17.3 percent decrease from the 1,794,795 filings reported for the 12-month period ending March 31, 2006, according to the institute. The 12-month June 2006 total was the lowest number of filings since the 12-month period ending Sept. 30, 2001, when there were 1,437,354 filings.

Under the 1978 act, applicants were entitled to immediate protections from creditors, known as an automatic stay against most debt collection and lawsuit actions. The act of 2005 limits on the automatic stay and no longer delays or stops evictions actions, lawsuits to establish paternity or child support, legal actions for child support, lawsuits related to domestic violence and divorce proceedings, and driver’s license suspensions, says Rogers.

“Most of my credit card [debtors] are incurred through a combination of medical bills they cannot afford to pay and failed businesses,” says Rogers. For the majority of her clients, she says people had fallen on hard times and had no way out of debt, except by filing for bankruptcy. During her entire 15-year career, she encountered only five cases where people sought to take advantage of the law.

The new law also holds lawyers liable if their clients give false information under 256102 (a)(2). More paperwork is now required, she says, and attorneys need to work more diligently and thoroughly research their cases to avoid sanctions. Because lawyers are charging more money than before to take on cases, the provision makes it more expensive for the poorest people.

One problem, Rogers mentions, is that under the new act, the claimant must show proof of their income by providing tax returns from the last tax year. If a bankruptcy filer has not paid taxes for the previous tax year, the bankruptcy case cannot proceed.

Ronald Singer, a University of Houston business professor, says the 2005 act left out the part where the creditors are held responsible for their part in bankruptcy. He says, “Credit card companies flood university students with their offers because they know that parents will pay off their children’s debt to prevent them from filing bankruptcy.”

On the positive side, Singer agrees with mandated credit counseling. Bankruptcy filers must participate in counseling for at least six months and debtors have to pay for it. Singer says counseling teaches the consumer to be more responsible and to avoid making the same mistakes. According to S.256 106 (a) of the 2005 bankruptcy act, “Individuals are ineligible for relief under any chapter of the code unless within 180 days of their bankruptcy filing they received an individual or group briefing from a nonprofit budget and credit counseling agency approved by United States bankruptcy trustee.”