Thursday, April 28, 2005

Non-Lawyerly Thoughts on the New Bankruptcy Act

A fairly good synopsis on the new bankruptcy act is this Chicago Sun-Times column.

It gives no mention of a supposed cap on Chapter 7 filings by persons whose income exceeds the average income of a set percentage of that state's population. That provision is most likely unconstitutional. A person cannot commit to a Chapter 13 repayment plan without sufficient income above their expenses; a denial of a Chapter 7 bankruptcy would deny them any recourse to individual bankruptcy. If the sole basis for this arbitrary denial of individual access to bankruptcy is the relative wealth of the citizen, I believe the federal courts will overturn that decision.

A household with a combined annual income of $120,000 has as much right to spend 100% of its income as a household with a combined annual income of $12,000; a household which enjoyed $120,000 income but saw it plummet to $60,000 may have as great a need for bankruptcy protections as a household that saw its income drop from $12,000 to $6000. The fact that far more people earn more than $6000 per year than earn more than $60,000 is irrelevant to the needs of the households in question, and to their property rights.

The new act will probably result in an increase in Chapter 7 filings in some places. When I worked as a legal assistant filing bankruptcy petitions in Minneapolis, the 4th Circuit courts applied a much tougher standard than is set out in this act. A person who could apply $100 a month above basic expenses with an allowance for food, clothing, and entertainment, was most likely going to be compelled by the Clerk of the Court to file a limited repayment plan under Chapter 13. They were so strict up there, there was talk of prohibiting pet ownership by Chapter 7 petitioners; the $20-$30 a month to feed a dog or cat could go to credit cards, and larger animals could not only represent a sizeable savings in terms of food, but could be sold off for payment of debts.

It is now clearly arguable that such decisions are contrary to the intent of Congress, and looser standards will probably be adopted.

I am disappointed that the Congress and the President did not push to adopt two reforms that would probably reduce the number of bankruptcy filings: an end to the 28-day billing cycle that puts real hardship on bimonthly wage-earners, and lower interest rates for dormant credit card accounts than for active accounts.


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