Life is expensive.
The costs of daily living are increasingly intimidating to the wallets and purses of Americans.
Necessary expenses such as utility bills, food, rent/mortgage payments, gasoline and car maintenance are all becoming more difficult to afford. Credit card bills, car loan payments and student loans are debts many Americans have. Medical bills – either in terms of the cost of insurance or the bills accrued due to the lack of insurance – are a burden as well.
In this light, it may have seemed downright dastardly for the government to pass changes to the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005.
Consumer advocates and bankruptcy lawyers screamed financial Armageddon when the changes were proposed. Therefore, it was hardly surprising that record numbers of Americans were rallying to bankruptcy lawyers in order to file Chapter 7 applications before the new law went into effect in mid-October 2005.
In the first week of October 2005, 102,863 Americans filed for bankruptcy, as opposed to the weekly average of 30,000. The total number of bankruptcies in 2005 increased 31.6 percent compared to 2004.
The informed nature of that rally to declare bankruptcy and destroy one’s personal credit for seven to 10 years based merely on a change in the law was questionable at best. The decision to declare bankruptcy is an undesirable outcome regardless of circumstance. Those who decided to rush to a declaration of bankruptcy to avoid the changes may have already found that their decision has come back to haunt them. And that haunting may be one of the most expensive experiences the filers will ever have.
After a bankruptcy, credit can be very difficult to obtain. Even if a specific bank is not included in a bankruptcy, it is not uncommon for that bank to either refuse to do future business with a bankrupt individual or hike up the interest rate charged. Many forms of debt, such as federal student loans and mortgages, are not susceptible to declarations of bankruptcy. Often, the bankruptcy court demands that most property be surrendered by the bankrupt individual, excluding a few exceptions dependant on state law.
The changes to the law that were passed in 2005 are not prohibitive of bankruptcy in general.
The legal concept of bankruptcy has a long history and is necessary for the cultivation of entrepreneurial risk as well as for the welfare of consumer spending power in general. The new law states that if one earns more than the median average for the state and can afford $6,000 over five years – $100 a month – they may have to file for a form of bankruptcy that entails a repayment plan established by the bankruptcy court known as Chapter 13.
Chapter 7, on the other hand, wipes most debts clean. Under the modified law, if one does qualify for Chapter 7, that applicant will find that they may have to attend credit counseling education. With the important role that credit plays in the lives of most Americans, the altering of the law to prevent the destruction of one’s credit is warranted and justified. The law must reflect the fact that credit today is important and that bankruptcy essentially destroys it for a substantial length of time.
The bankruptcy attorneys and consumer advocates who used this change in the law as a megaphone for financial fear are still at it, however. A survey released by the National Association of Consumer Bankruptcy Attorneys accuses the new law of not working. This is the same group of people that caused such a stampede in bankruptcy filings in late 2005 that the bankruptcy rate escalated to threefold the average and bankruptcy attorneys nationwide were refusing new clients. One must question the veracity of their judgment.
By convincing hundreds of thousands of consumers that their ability to declare bankruptcy was endangered, “advocates” for consumers failed. They failed by threatening the financial future of those who believed them and unnecessarily declared bankruptcy before the law changed. More acutely, they failed because in late 2005, with their induced panic at an all-time high, it is very likely that some consumers who really needed to declare bankruptcy were unable to do so.
Not even the changed law is that egregious.
Jordan Capobianco is a senior majoring in English literature.