Opposition to New Law

Should the "Bankruptcy Abuse Prevention and Consumer Protection Act" Now Pending in Congress Be Called the "Credit Collection Act"?

By Laura J. Margulies

One of the bills to be addressed this session in Congress is the "Bankruptcy Abuse Prevention and Consumer Protection Act." Creditors such as banks, credit card companies, credit unions and car lenders have been vigorously lobbying for its passage. They claim that the new law is needed to curb abuses found in the current bankruptcy law. These companies feel so strongly about this issue that they have contributed $4.7 million to various PAC's and individual congressional and senatorial campaigns in the 2002 election. See, The Center for Responsive Politics for more information on corporate donations. Why are they lobbying so hard for its passage? Because a close inspection of the fine print in the proposed law reveals that it will be very difficult if not impossible for some debtors to file for bankruptcy.

Proponents of the new legislation claim that it is aimed at reducing the number of Chapter 7 cases while encouraging more people to file Chapter 13. A Chapter 7 is a liquidation proceeding whereby a debtor discharges his debts and the Chapter 7 Trustee liquidates his non-exempt assets for the benefit of the debtor's creditors. A Chapter 13 is a reorganization proceeding in which the debtor consolidates his debts into one monthly payment to a Chapter 13 Trustee. The monthly payment is based on the debtor's disposable income. The Trustee then disburses the payment to the debtor's creditors.

In order to qualify for Chapter 7 under the current law, a Chapter 7 Trustee analyzes the debtor's monthly income and expenses to determine whether if fact he has any disposable income that could be used to fund a Chapter 13 plan. In order to qualify under the new law, a debtor will have to pass a means test. This test uses Internal Revenue guidelines to determine what expenses a debtor will be allowed in bankruptcy rather than the debtor's actual living expenses. The means test formula uses the debtor's prior six months' income to calculate what amount of money the debtor will have to pay each month to his creditors, even if that income is no longer applicable due to job loss or medical illness. Thus, the new law requires debtors to repay debts based on income that may no longer be available to them. The debtor may not ask the court to review the circumstances that led to his bankruptcy filing as the judge has no discretion to exempt debtors from means-testing. Furthermore, anyone whose debts stem primarily from consumer debts, and who earns the median income or above for a person in the debtor's home state will be required to file Chapter 13 regardless of his expenses.

As a further disincentive to file for bankruptcy, the new law reduces the assets a debtor is allowed to retain after bankruptcy. For example, a debtor is currently allowed to retain certain household goods given as security for a loan by avoiding the lien created by non-possessory, non-purchase-money lenders. These items include all goods used by the debtor for personal use or use by the debtor's dependents. Under the new law, Section 313, a debtor may not avoid these types of liens if they are secured by items not listed in the new law as "household goods." The items excluded are, for example, a computer (if not used by the debtor's children), a printer, electronic equipment, and more than one television and radio. Thus, under the new law a debtor cannot avoid a non-possessory, non-purchase money lien on items that may have nominal value to the creditor, but great value to the debtor. In order to keep the computer (or more than one television or one radio), the debtor will have to reaffirm the entire amount owed to the secured creditor, regardless of how much the secured creditor could realize if it were to repossess the computer or other excluded items and sell them.

Besides limiting those eligible for bankruptcy relief, the new law requires that significantly more paperwork be completed and attached to the bankruptcy case. In addition to preparing the current forms needed to file a case, debtors will need to submit means test paperwork, copies of their paycheck stubs, copies of their tax returns and certificates from a credit counseling agency. Even those debtors who earn less than the median income will need to provide a detailed calculation using Internal Revenue standards to justify their monthly expenses. Any deviation from the Internal Revenue limits will require separate documentation explaining the "special circumstances" to justify the additional expense.

As stated above, the new law, Section 315(b), requires a debtor to file copies of his pay check stubs or other evidence of income he received for the 60 days before the debtor filed bankruptcy. If the debtor cannot provide these documents, his case will be automatically dismissed (Section 316). That means that if a debtor was not given a paycheck because he was fired, or because the debtor's employer went out of business within 60 days of the bankruptcy filing, he will not be eligible to file bankruptcy. In addition, the debtor will also be required to submit copies of his tax returns for the three years prior to filing.

Debtors will not be eligible to file bankruptcy unless they first attend credit counseling with an approved agency and show proof of their attendance of credit counseling with their bankruptcy petition. All these additional documents will need to be reviewed by the trustees appointed by the Justice Department to administer the bankruptcy cases. The trustees are sure to demand an increase of their fees due to the increase in their workload. Finally, the law extends the time a debtor can apply for bankruptcy and receive a discharge from six years to eight years.

Even the benefits of filing Chapter 13 have been reduced under the new law. Currently, a debtor has a choice of repaying his debts over a period varying from three to five years. Under the new law, 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 debtors with less income may still file a three year plan and avoid the additional expenses of a five year plan.

Today some debtors choose to file a Chapter 13 instead of a Chapter 7 because of the "superdischarge" provision in Chapter 13 cases. This provision allows debtors to discharge debts obtained by false representation or fraud. Under the new law, debts obtained by fraud or false representations are non-dischargeable, so that if the debtor's Chapter 13 plan does not provide for full payment of unsecured debt, then upon completion of the plan, any unpaid balance of a debt obtained by fraud is still owed to the creditor. Omittng the superdischarge provision will further discourage bankruptcy filings.

Besides making it more burdensome and costly to file, specific provisions of the proposed new bankruptcy law have been inserted to help certain creditors, such as landlords, credit card companies, automobile lenders and credit unions, recover more money from debtors. Landlords benefit under the new law as they will be able to evict a tenant without the tenant being able to stop the eviction by filing bankruptcy. Currently, if a tenant files for bankruptcy, a landlord needs to file a motion for relief from the automatic stay of §362 of the Bankruptcy Code in order to continue an eviction proceeding against the tenant. Under the new law, the landlord may evict a tenant notwithstanding the automatic stay. A Chapter 13 plan which provides for curing pre-petition defaults in rent is meaningless under the new law because the landlord is not required to allow the debtor time to cure the default before evicting him.

The credit card industry also benefits from the new law because it converts previously dischargeable credit card charges into non-dischargeable debts. For example, the law currently provides that a debtor's cash withdrawals aggregating $1,150 taken out within 60 prior to filing are presumed non-dischargeable. Under the new law, a debtor's withdrawals totaling just over $750 taken out within 70 days of filing for bankruptcy are non-dischargeable. Thus, a debtor who withdraws $75.00 a week to pay for medication or groceries in the ten weeks prior to filing will find those charges non-dischargeable.

The car loan industry benefits too from the new law. Under the law today a debtor in a Chapter 13 case may bifurcate secured loans into secured and unsecured debt, with the exception of mortgage loans on the debtor's 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 the other unsecured claims in the debtor's Chapter 13 case. Under the new law, a debtor cannot bifurcate an automobile loan if the automobile loan was obtained within 2-1/2 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.

Under the present law, when a debtor wants to reaffirm a debt (meaning pay it back even though it could be discharged), the reaffirmation agreement must contain certain disclosure requirements, and it cannot be approved by the court if paying back the debt would be an "undue hardship" on the debtor. The new bill exempts credit unions from complying with these requirements.

Although the title in the new law contains the words "Consumer Protection Act," it does nothing to curb abusive lending by creditors. Some creditors are knowingly extending credit to risky borrowers, such as college students without income and elderly people on fixed income. Credit card companies sent out five billion solicitations in 2001. The new law, if passed, would make it harder for individuals to file bankruptcy, while encouraging lenders to lower their credit standards even further and solicit riskier consumers. Rather than requiring a creditor to explain to its customers exactly how long it will take to pay off the balance of their debt, and the total amount that will be paid on the debt if only minimum payments are made, the bill only requires that creditors give a general example related to minimum payments. It is unlikely creditors will reveal, for example, that a consumer making minimum payments of $170.00 per month on a $12,000 outstanding balance with a 17% interest rate would take 45 years to pay off the debt for a total cost of $91,230.05. If the consumer missed a payment and the interest rate increased to 20%, the minimum monthly payment would increase to $200.03 per month and cost $106,687.42 and would still take 45 years to pay off. If creditors were required to provide 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 each customer's account.

Once the American understand the true nature of the proposed new 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 new law falls far short of this American goal. The remarkable imbalance in favor of creditors in the proposed law needs to be addressed before being enacted into law.