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One of the biggest pieces of unfinished legislation inherited by the new Congress is the proposed Bankruptcy Abuse Prevention and Consumer Protection Act. Banks, credit card companies, credit unions, car loan lenders, and other creditors have lobbied vigorously for its passage. They feel so strongly about it that they reportedly contributed $4.7 million to various political action committees and House and Senate campaigns in the 2002 election. But why are they lobbying so hard? Proponents of the new legislation claim that it will curb abuses found in the current bankruptcy law. But a close inspection of the fine print reveals its real attraction: The bill will make it very difficult, if not impossible, for some debtors to file for bankruptcy at all. MEANS TESTING Under the U.S. Bankruptcy Code, personal bankruptcies generally proceed under Chapter 7 or Chapter 13. A Chapter 7 bankruptcy is a liquidation proceeding whereby the debtor discharges his debts and the trustee liquidates any nonexempt assets for the benefit of the creditors. A Chapter 13 bankruptcy is a reorganization proceeding in which the debtor consolidates his debts into one monthly payment to an appointed trustee, who then disburses the payment to the creditors. The size of the monthly payment is based on the debtor’s disposable income. Supporters of the proposed bankruptcy bill say that it will shift bankruptcy cases from Chapter 7 to Chapter 13. But at what cost? For a debtor to qualify for Chapter 7 under the current law, the trustee must analyze the debtor’s monthly income and expenses to determine whether he has disposable income that could, in fact, be used to fund a Chapter 13 plan. To qualify for Chapter 7 under the proposed legislation, the debtor will have to pass a specific means test. This test uses Internal Revenue Service guidelines, rather than the debtor’s actual living expenses, to determine what expenses are allowable. The means test formula also looks at the debtor’s income for the prior six months to calculate his monthly payment even if that income is no longer applicable due to job loss or medical illness. Thus, some debtors will have to repay debts with income they no longer have. Furthermore, the bankruptcy judge has no discretion to exempt debtors from means testing. And anyone whose debts stem primarily from consumer debts and who earns at least the median income for a person in his home state will be required to file under Chapter 13 regardless of his expenses. BYE TO THE COMPUTER As a further disincentive to file, the bankruptcy bill reduces the assets a debtor is allowed to keep. For example, a debtor is currently allowed to avoid (i.e., eliminate) the lien on, and thus retain, certain household goods given as security for a loan. These include all goods used by the debtor personally or by his dependents — such as appliances, tools, or musical instruments. Typically, these goods have only nominal value to the creditor, but great value to the debtor. Under the proposed bankruptcy bill, a debtor may not avoid such nonpossessory, non-purchase-money liens if they are secured by items not listed in the bill as “household goods.” The excluded items include computers (if not used by the debtor’s children), printers, certain electronic equipment, and more than one television and radio. Thus, to keep the computer, for example, the debtor will have to reaffirm the entire amount owed to the creditor (i.e., agree to pay it back), regardless of how much the creditor could realize if it were actually to repossess the item and sell it. MORE PAPERWORK Further discouraging the use of bankruptcy, the bill requires that significantly more paperwork be attached to the bankruptcy application. First, the debtor will need to submit means-test paperwork. Even those who earn less than the median income will have to provide a detailed calculation using IRS standards to justify their monthly expenses. Any deviation from the IRS limits will require separate documentation explaining the “special circumstances” to justify the additional expense. Second, the bankruptcy bill requires a debtor to file copies of his paycheck stubs or other evidence of income received in the 60 days before filing. If he cannot provide these documents, his case will be automatically dismissed. Thus, if a debtor was not given a paycheck because he was fired or his employer went out of business, he will not be eligible for bankruptcy. Third, the debtor will be required to submit copies of his tax returns for the three years prior to filing. Fourth, debtors will not be eligible to file for bankruptcy until they attend credit counseling with an approved agency and provide proof of that attendance with their bankruptcy petition. All these additional documents will have to be reviewed by the trustees appointed by the Justice Department to administer bankruptcy cases. Because of the increase in their workload, the trustees are sure to demand an increase in their fees — which will therefore increase the filing fees paid by debtors. DOWNSIZING CHAPTER 13 Even the specific benefits of filing for the supposedly more desired Chapter 13 bankruptcies will be reduced under the proposed legislation. Currently, a debtor has a choice of repaying his debts over a period varying from three to five years. Under the bill, anyone earning more than the median income of similarly sized families in his home state will be required to file a five-year plan. Only those with less income may still file a three-year plan and thereby avoid the greater expenses of a five-year plan. In addition, the bankruptcy bill will eliminate the “superdischarge” provision of Chapter 13. Today, some debtors choose Chapter 13 over Chapter 7 particularly because of that provision, which allows debtors to discharge debts obtained by fraud or false representation on the part of the debtor. Under the bankruptcy bill, however, debts obtained by fraud or false representation are nondischargeable. Thus, if the debtor’s Chapter 13 plan does not provide for full payment of such debts (presumably because full payment is too burdensome), then any unpaid balance is still owed after the plan has been fulfilled. GOOD FOR CREDITORS Besides making it generally more costly and less attractive to file, specific provisions of the bankruptcy bill have been inserted to help specific kinds of creditors — landlords, credit card companies, car loan lenders, and credit unions. Landlords will find it easier to evict tenants. Currently, if a tenant is behind in his rent and files for bankruptcy, a landlord must file a motion for relief from the automatic stay of the Bankruptcy Code in order to continue an eviction. Under the bankruptcy bill, the landlord may evict a tenant notwithstanding the automatic stay. A Chapter 13 plan that provides for curing defaults in rent may well be pointless because the landlord need not give the debtor time to cure the default before evicting him. The credit card industry benefits because the bankruptcy bill will convert dischargeable credit card debt into nondischargeable debt. The law currently provides that cash withdrawals totaling $1,150 taken out within 60 days prior to filing for bankruptcy are presumed nondischargeable. But under the bill, withdrawals totaling little more than $750 taken out within 70 days of filing are nondischargeable. Thus, a debtor who withdraws $76 a week to pay for medication or groceries in the 10 weeks prior to filing will find those debts nondischargeable. The car loan industry benefits too. Under the law today, a Chapter 13 debtor may bifurcate secured loans into secured and unsecured debt (with the exception of mortgage loans on a primary residence). For instance, if a debtor owes $10,000 on a car worth $4,000, the debtor can pay the value of the car, $4,000, and treat the balance of the loan, $6,000, as an unsecured debt to be paid pro rata with other unsecured claims. Under the bankruptcy bill, a debtor cannot bifurcate an automobile loan if the loan was obtained within 212 years of the bankruptcy filing. Thus, the debtor will be forced to repay the entire loan even if the vehicle is worth substantially less than the amount owed. Lastly, credit unions get a bonus. Under the current law, when a debtor wants to reaffirm a debt, the reaffirmation agreement must contain certain disclosure requirements, and it will not be approved by the court if paying back the debt would be an “undue hardship.” The bankruptcy bill exempts credit unions from these requirements. THE REAL NUMBERS Although the title of the proposed legislation contains the words “consumer protection,” the bill, in fact, does nothing to curb the kind of abusive lending that lures people into debt. Credit card companies sent out five billion solicitations in 2001. Some creditors knowingly extend credit to risky borrowers, such as college students and elderly people on fixed incomes. Yet the proposed legislation will make it harder for such individuals to file for bankruptcy, while encouraging lenders to lower their credit standards even further and solicit riskier consumers. Rather than requiring a creditor, for instance, to explain to its customers exactly how long it will take to pay off their debt and the total amount that will be paid if they make only the minimum monthly payments, the bill merely forces creditors to give a general example. It is unlikely then that creditors will reveal that a consumer making, say, minimum payments of $170 per month on a $12,000 outstanding balance with a 17 percent interest rate will need 45 years to pay off the debt, at a total cost of $91,230.05. If the consumer misses one payment and the interest rate rises to 20 percent, the minimum monthly payment would increase to about $200 and the total cost of paying off the debt in 45 years will be $106,687.42. Of course, if creditors were required to provide such specific information on each customer’s account, it would likely discourage the use of credit cards. For this reason, the credit industry opposes any requirement to provide information specific to individual accounts. Once Americans understand the true nature of the proposed bankruptcy law, it will be crystal clear why the credit industry has spent millions and millions of dollars lobbying Congress for its passage. The original intent of the bankruptcy laws was to give the “honest but unfortunate” debtor a fresh start. The proposed legislation falls far short of this goal. The remarkable imbalance in favor of creditors needs to be righted before the bill becomes law. Laura J. Margulies is the managing partner of Laura Margulies & Associates, representing debtors and creditors in bankruptcy proceedings, foreclosures, and debt restructurings in Maryland and the District. She can be reached at [email protected].

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