What about Bankruptcy? Should I consider it?
What Does The New Law Change?

Discussed below are some bankruptcy basics, advantages and
disadvantages of using bankruptcy and the effects and
the deficiencies of the New Bankruptcy Law

Questions and answers about bankruptcy:

1.   What is or what does it mean when you file bankruptcy?

The ability to file Bankruptcy provides individuals and businesses with a way to survive a financial crisis without a complete financial meltdown. In essence, it allows you to ease your debt dilemma by paying off certain creditors with the equity in your assets (referred to as a Chapter 7- see note below). Or, with a fixed payout using the portion of your income available after necessary living expenses (referred to as a Chapter 13). Also, as a result of the new bankruptcy law, some people will have to use both assets and income to qualify. Qualifying debts (typically unsecured debts and some tax debts) remaining after the liquidation of assets or a five year payout (three years in some cases) or possibly a combination of both will be discharged or wiped out.

2.   Can all debts be discharged in bankruptcy?

No! Normally only unsecured debts (credit cards, medical bills, etc.) and some tax debts. Secured debts as mortgages, auto loans, equity loans and any other obligation for which creditors hold collateral or have special rights to collect are not dischargeable in a bankruptcy. However, secured creditors can take no action to collect such debts until the bankrupt individual or business is discharged or the bankruptcy is dismissed.

3.   It sounds like an easy way out! Why even consider other options?

This is because there are many problems that filing bankruptcy can bring about which you should be aware of:

• Credit - Your credit standing will be severely damaged and it will be difficult for you to obtain credit at reasonable interest rates for at least 10 years.
   

• Personal humiliation - You may be looked upon as a financial failure who did not attempt to repay debts and it could cause embarrassment to you and your family.
   

• Immoral – For some filing will go against their moral fiber and ethical standards.
   

• Reputation – It can become a major character reference problem causing trouble with employment, business opportunities and personal or social relationships.
   

• Liquidate property – You may have to liquidate treasured property as your home, luxury cars, jewelry, art, collectibles.
   

• Cosigners - Anyone who guaranteed or cosigned your debts may now be liable to pay and will be hounded by your creditors for payment.

In addition, with the new bankruptcy law, filing will be more difficult, not nearly as quick and more costly. Also, with the new income test and the need to use assets and income to pay off creditors, filing bankruptcy will not be as advantageous as it was prior to the new law. 

4.   Are there circumstances where filing bankruptcy may be necessary?

Yes! Even with the new law, in some cases it may be an important defense mechanism:

• To protect valued personal assets and business property from seizure by secured or judgment creditors and tax collectors.
   

• To prevent or stop such collection actions as wage garnishments, evictions from personal or business property and foreclosures on your home or business. 
   

• To stop the IRS or a State Tax Agency from closing your business.

Bankruptcy may also be an acceptable way to end a debt problem if your life situation is such that the disadvantages of filing don’t apply to you. Factors such as your age, being disabled, retired and for one reason or another being unconcerned about your credit, your reputation or your ability to get credit in the future.

5.   Why does the US Constitution provide for bankruptcy relief?

It was the expressed intent of the framers of our constitution to provide relief from debt to our citizens. Reference is made to the United States Constitution, Article I, Section 9 which says “…..establish uniform laws on the subject of bankruptcies throughout the United States”.

However, things were very different when our constitution was written. There were no credit cards and credit was almost impossible to obtain without collateral. Getting into debt was a disgrace and getting into it irresponsibly could get you jail time (debtor prisons which are now abolished). Because of the way it was then, the bankruptcy laws worked and did not facilitate abuse of the system.

6.   Why were changes needed?

Due to the arrival of the “Legalized Loan Shark Generation” (the MBNA’s, the Citi Banks, the Capital One’s etc., etc.,); Easy Credit or the Credit Card Era, change was needed. This is because it opened loopholes for unscrupulous individuals to use bankruptcy to steal by deliberately running up enormous credit card balances and using bankruptcy to walk away without paying. It put bankruptcy into a different playing field and I can’t disagree that some changes made by the new law were needed to curb this form of abuse.

7.   Why is the New Bankruptcy Law deficient?

Because it only addresses the abuse of the consumer while it completely ignores the contemptible abusive practices of the lenders. It’s a law that was literally purchased by the lenders from Congress and the President with millions of dollars in political contributions. Not a bad investment when you consider that in return it will mean billions for them in additional revenues over the next several years. Let’s look at the major abuses the law did not address:

• It does not address the primary cause of our nation’s dilemma with consumer debt; the credit card lenders license to steal with the outrageous interest rates and penalties they charge.
   

• It does not address the credit card lenders unregulated ability to deceitfully market the schemes they create to rip off consumers and lure them into their insidious “debt traps”.
   

• It fails to plug the loopholes and financial planning tools built into the bankruptcy system for the wealthy namely Homestead Exemptions and Asset Protection Trusts.

8.   Why is the law ill-conceived and unfair?

As I stated above, I agree that some changes made by the new Bankruptcy Law were needed to curb consumer abuse. However like many laws or amendments to laws to plug loopholes such as this one, it is overactive and in this case severely tainted by the enormous influence of the lenders:

• It ignores the wisdom of the authors of our constitution who intended bankruptcy to provide help for those who become hopelessly indebted for reasons beyond their control. It treats victims the same as abusers.
   

• It requires debt counseling prior to filing bankruptcy. This certainly makes sense until you learn that the U S Senate found many Debt Counseling Companies to be highly abusive with many illegally operating as Non-Profit Organizations. They disguise themselves as “do-gooders” with the intent to steer you into their debt consolidation services where they make their money which in many instances comes from kickbacks they receive from the lenders.
   

• It disregards the wisdom of hundreds of law academics and Federal Bankruptcy Judges who cautioned Congress and the President as to how flawed this law is.
   

• It takes the human element out of the bankruptcy system eliminating the discretion of experienced Bankruptcy Judges and Trustees. It tosses their wisdom and the element of fairness they brought to the system out the window.
   

• It will make filing bankruptcy more costly and less available to those in need by causing lawyers to charge more because of their expanded role. And also, because it’s expected that many lawyers will stop offering bankruptcy services and that pro-bono services for needy cases will come to an end.

9.   In a nut shell what are the more significant changes this new law brings about?

• It will make filing bankruptcy more difficult, less advantageous and more expensive.
   

• It provides little or no special relief where debt is caused by severe health problems or other catastrophes.
   

• It will require more people to file Chapter13 (payout from income) or where applicable, a combination of Chapter 13 and Chapter 7 (payment from the liquidation of assets).
   

• It takes the human element out of the bankruptcy system with cold fast rules to be applied even in the most sensitive cases. It greatly reduces the latitude of the court (Bankruptcy Judges the Trustees) wasting their wisdom.
   

• What you can pay from your income will now be determined by State income statistics and IRS cost of living standards which many believe are unrealistic, grossly understated and not far from the poverty level. This will force many people to make radical lifestyles changes.
   

• It extends the payout period in a Chapter 13 in most cases from three years to five years.
   

• It eliminates the “auto value break” (value of auto vs. loan balance) to favor the finance companies. It makes you pay the portion of the loan that exceeds the value of the auto which under the old law was considered unsecured debt and dischargeable (another gift to the lenders).
   

• It requires credit counseling for six months before you can file ignoring disclosures of the abusive Debt Counseling Industry (excessive fees, pressure tactics & poor service).
   

• It requires attendance at money management classes before debts can be discharged. 
   

• It places more responsibility on attorneys for inaccurate information which will increase their fees and is likely to chase many attorneys out of the bankruptcy business.

Our bankruptcy system needed an overhaul to plug loopholes used by abusive consumers but this law goes entirely too far punishing even those whom our Founding Fathers sought to protect. It’s oppressive to the middle and lower classes, an enormous windfall for the unscrupulous money lending industry, continues to be a financial planning device for the rich, and it’s the kind of unfair one-sided legislation that can contribute to bringing this great nation down.

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