Thursday, October 04, 2007

Bankruptcy Reform Act

From 1998 until 2005, the lending industry complained that bankruptcy laws needed changing because consumers were being allowed to game the system: run up large credit debts and then discharge them in bankruptcy. Consumers were described as deadbeats, irresponsible, and in a few cases, 'thieves'.

Well, the Bankruptcy Reform Act (BARF for those of us in the biz) passed in 2005 with a fair amount of publicity over the resulting wave of bankruptcy filings...some 2 million filed that year, a 33% increase over the year before. Many people predicted what would happen after the law passed and in large part, they were right. Let's look at a few.

Credit counseling was mandated but considered a waste of time, a burden on consumers and a boon for the credit counseling industry - an industry supported by their parasitic relationship with lenders. Reports have shown that the credit counseling has been of no particular use. 97% of consumers taking the counseling had no means to repay any of their debt (study from earlier in 2006) yet almost 40% actually filed chapter 13...meaning they tried anyway. Some have noted that as many as 10% that have taken the counseling did not file, meaning that the counseling helped them in some other way. There is no evidence that those that did not file entered into alternative debt management programs. It is equally possible - I might suggest considerably more likely - that they simply could not AFFORD to file bankruptcy due to the increased costs. The credit counseling industry did benefit by getting many, many new clients, but they are overburdened by the flood of people paying a small fee (small in relationship to their claimed costs).

Means test: This has been a disaster. This was supposed to be a bright line test to determine the potential for a debtor to repay debts. More than 85% of filers pass the means test - they have insufficient income to repay debts, BUT, almost 40% of debtors are filing chapter 13s!

Early last year, less than 6 months after passage of a 'perfect' bill requiring no amendments, Congress amended the law to allow charitable contributions into the means test...leading the way was Senator Hatch....consigliere of the original bill. Further, there have been complaints that the test lets debtors with high secured debts off the hook. It is true, the more secured debt you have, the less you will end up paying to unsecured creditors (the main supporters of the reform). The means test has led to many interesting outcomes, including a ruling that a family with over $2500 a month in disposable income needed only to pay $1500 a month as specified by the means test.

Filings would go down: Duh. For the three months after the law went into effect, filings were minimal compared to previous years. Many that would have filed anyway in 06, filed before the law changed. But filings have steadily increased. Even with increased costs, document burdens and longer preparation times, filings have already reached levels seen in 2000/2001 with no indication that they are leveling off. The current rate of increase, if maintained, will find filings near pre-BARF levels by the end of next year. There is still a strong perception that bankruptcy is no longer that perception wears off, filings will grow faster.

Those that need bankruptcy will still be able to file: Many attorneys that filed bankruptcies before, have stopped. Fees have double in almost all areas (higher in some) and the filing fees and counseling fees have added to the burden of those least able to afford it. Too broke to go broke. Fewer attorneys, higher fees, higher costs, heavier burdens. This has fallen dis proportionally on those least able to afford it. It appears that 90% of bankruptcy filers are BELOW their states median income. The drop off in filings are right in this group.

Lenders would reduce interest rates: HA, HAHAHA, have you seen any reduction? Proponents said that easy bankruptcy added $400 to the cost of everyone. Apparently, only the lenders have benefited from the 'reduction' in this cost as across the board, profits have never been higher...except....

now. Foreclosures, defaults on mortgages, are creaming lenders. Bankruptcy might help debtors keep their homes and default on less mortgages, but bankruptcy is less available and those lenders involved in mortgages also are getting hammered. Many will file bankruptcy, because you see...the Reform Act of 2005, all but ignored Chapter 11 changes...

Welcome to the bankruptcy court fees are paid first....

No comments: