Scared into bankruptcy

Analysis:

On Thursday March 10 the Grand Rapids Press ran a story in the business section entitled “Scared into Bankruptcy”, which was about bankruptcy reform legislation. The article appeared the same day these bankruptcy reforms were voted on, so the actual vote was not reported on. Nor was the vote actually reported on in the GR Press in the days following. The GR Press article states that the Reform legislation was “expected to pass”, which it did, 74 to 25. All the opposing votes came from Senate Democrats. The two Michigan senators split on this issue, with Levin voting nay and Stabenow voting yea.

As to the actual legislation, the article gives little actual information. A lawyer and a federal Bankruptcy judge are quoted. The judge is quoted giving a hypothetical example of how current bankruptcy laws could be abused while the Bankruptcy lawyer gives some general information about the type of people that declare bankruptcy. No where in the article does the reporter corroborate these statements with statistics or resources. At one point the reporter refers to advocates for this legislation but does not say who they are, merely noting that “Bankruptcy reform is needed, advocates say, because some people abuse the system.” The primary advocates for this legislation is the credit card and financial industry, which has been a major source of campaign contributions for both parties.

These reforms make it harder for individuals to get their debts absolved through the bankruptcy process. 1.6 million Americans file for personal bankruptcy protection–more than five times as many as in 1980, every year. According to a new study by the think tank Demos, 90 % of those who declare personal bankruptcy do so as the result of job loss, medical bills, or divorce. The Credit card industry claims that abuse of the personal bankruptcy laws costs them 3 to 4 billion a year. Again, according to Demos, the credit industry, which grossed a profit of about 30 billion last year, is not required by this new legislation to alter their behavior at all. So reforms such as reining in credit card solicitations or putting caps on interest rates or late fees, over-the-limit fees and other penalties, which could possibly help keep people out of bankruptcy in the first place, are not part of these reforms.

Story:

Thursday, March 10, 2005

By Julia Bauer

The Grand Rapids Press

GRAND RAPIDS — Bankruptcy lawyers and judges are bracing for a new wave of business from financially strapped people in West Michigan.

The threat of stricter rules for bankruptcy will push some people into court sooner rather than later, said attorney Christian Krupp II.

“We’re unbelievably busy. Amazingly enough, the news about the change in bankruptcy laws actually spawns a ton of phone calls,” Krupp said.

“As soon as they hear, they think it’s something a lot more severe. It scares them, and they immediately want to hurry up and file.”

Those who call are trying to beat new rules that would make it tougher to file for Chapter 7 liquidation.

As the most drastic form of bankruptcy, a debtor must sell most possessions to pay off creditors.

Once that process ends, the person is able to jettison most major debt such as credit cards and doctor bills.

“The debtor basically walks away from debts without losing much in the way of property,” said Judge Jeffrey R. Hughes, with the United States Bankruptcy Court of West Michigan.

“In many, many Chapter 7’s, there’s no distribution to unsecured creditors.”

Those are credit card companies, hospitals and other debts without collateral.

The legislation gliding toward congressional passage following the Senate vote would constitute the most sweeping overhaul of U.S. bankruptcy laws in a quarter-century.

Senate passage, expected today, and likely House approval of the bill next month would deliver to President Bush the second of his pro-business legislative priorities.

Bankruptcy reform is needed, advocates say, because some people abuse the system.

“A classic example of the inequitable use of Chapter 7 would be the medical student who just gets out of medical school and has a whole slew of credit card debt,” Hughes said. “He files Chapter 7, gets all that debt discharged and goes off and earns a six-figure income.”

Trustees who oversee the repayment by debtors can sway which type of bankruptcy the person can pursue, Krupp said.

If the reform is approved, the formula would be less flexible. Michigan families with incomes averaging $45,000, who also clear $100 or more a month, would be restricted to the repayment system of Chapter 13.

“One of the standard complaints by the consumer lobby is that the whole statute really isn’t designed to alleviate a problem,” Hughes said.

“(They say) it really is just simply a mechanism for making the banks more profitable.”

As one of three bankruptcy judges based in Grand Rapids, Hughes said he has no opinion on the reform bill. Whatever Congress approves, he will follow, he said.

Krupp said most financial crises come after a person loses a job or faces huge medical bills.

People do not tend to abuse the bankruptcy option, he said. They view it as a last resort.

“Usually it would be someone like people laid off from Steelcase who are now on unemployment, then they have burned through all of their 401(k).

“Then they are filing for bankruptcy. People say, ‘I can’t believe it has gotten this bad,'” Krupp said.