Legal, Laws, and Regs

Koi-side economics

Recovered from the Wayback Machine.

New bankruptcy laws went into effect in the US this week. For the best detailed description of these law changes, check this NOLO article.

The new law makes little sense in relation to today’s economy. Surveys of those filing for bankruptcy find they do so because of medical bills, loss of jobs, and divorce–only 3% could be considered as abusive filings. Unlike the banking industry’s assuptions given in a press release on the matter, I know of no one who filed for bankruptcy because they lived expensively and then decided to just bug off from the responsibility.

I don’t know what I consider of the new law to be the most flawed. There is the issue of ‘credit counseling’, whereby new industry will now spring up to provide spurious ‘economic advice’ and charge $75.00 or more to people who have little or no money. I find the concept of forcing people into credit counseling from a Congress that has managed to create a history making deficit to be rather ironic myself.

Then there’s the valuation of property if you do file Chapter 7. Each person filing is given so much in exemptions of what they make keep, all of which changes from state to state. In Missouri, you can keep about a 1000.00 dollars of exempt personal property. Before the change in law, items you kept were valued at what their sale would bring, using eBay or other auction or yard sale. Now, each item has to be valued at retail, in consideration of age and condition. Since the trustees would not get this amount selling the items, the only purpose for this change in the law is punitive–forcing those in bankruptcy to literally lose everything: from a 3 year old television, to a 10 year old bed, to a 13 year old frying pan. Even a pet has to be valued at it’s ‘retail’ value.

No, I think my favorite flaw is that those under Chapter 13 bankruptcy have to follow IRS guidelines for cost of living. These are set the same for all 48 states (Alaska and Hawaii have their own), which means whatever you pay for food in St. Louis is the same amount you can spend for food in San Francisco and so on. These are so restrictive, there’s almost a guarantee that Chapter 13 filers will fail before the five years is up.

This is ultimately the legacy of the new law: it won’t work. Unfortunately, though, while it won’t work, people already harmed by circumstance will be further harmed by law. According to Judge David Houson in Mississippi:

Congress changed the “gem of our bankruptcy system” so much that there’ll be “a subculture of people that will owe a lot of money and just move away,” Houston said in a recent interview.

The new law imposes restrictions aimed at preventing people from using the bankruptcy court to dodge debts they could actually afford to pay.

The “gem” in the current system, Houston said, is the Chapter 13 bankruptcy provision, which lets people with large debts reorganize their finances with court oversight to repay some or all the money over an extended period to creditors.

While Congress intended to steer more debtors to take the Chapter 13 route, Houston said the reforms could have the opposite effect – meaning more debtors will run away from creditors and they won’t get the money due them.

The law imposes disincentives for people to repay debts over time in a court-monitored process to ensure creditors get their money, he said.

“That’s one of the sad parts of the legislation. It’s going to (hurt) the Chapter 13 program,” Houston said.

Even before it went into practice, caveats had to be added to waive credit counseling for those whose homes and all livelihood were wiped out by Katrina. As for the provision that people filing bankruptcy have to do so from their local community, this is problematic when you consider that many new victims no longer have a local community.

In the meantime, to compensate for the surge of bankruptcies this new law has generated, credit card companies are raising their interest rates to 29 percent, for those already struggling with card costs. When one considers that wages have been virtually flat for the last several years while health insurance costs rise an average of 11 to 13% a year and fuel costs have jumped 200%, this interest increase will most likely force even more into bankruptcy next year–a cause and effect these companies seem incapable of understanding.

I used to think that those in favor of bankruptcy reform were being greedy and rapacious. Lately, though, I think that the laws reflect a growing mediocrity in the economic and financial community. In other words: those pushing for change aren’t thinking through the consequences; they’re just looking for quick ways to increase today’s bottom line, even at the risk of tomorrow’s financial stability. The last few years have shown a number of optimistic predictions from these same economists–ones that don’t match what we’re seeing and experiencing for ourselves. They remind me of weather forecasters who never look out the window and persist in predicting a sunny day even while it’s pouring rain outside. In the case of bankruptcy law, though, the credit card companies and banks are seeing a quick way to keep money flowing from people who literally have none.

There is some small justice, though, a bit of black humor associated with the new bankruptcy law. MBNA, the corporation most active behind the new law, has seen a significant decrease in profits this year. You might think it’s because of the increased bankruptcy filings, but no, that’s not it. According to Consumer Affairs:

Of potentially greater long-term significant, more and more consumers — perhaps stung by exorbitant increases in their interest rates — are paying off their MBNA credit card debts faster than expected.

Like other banks, MBNA relies on the interest, service fees and late charges it gets from its credit cards.

Perhaps the passage of S.256, the Bankruptcy Reform and Consumer Protection Act, which makes it harder to resolve credit debt through bankruptcy, has scared debtors into taking care of business faster. The financial giant spent millions of dollars priming the political pump to ensure it would be able to wring the last drop of blood from its credit card customers.

The moral of this story?

Paying off your credit card debt not only cleans up your balance sheet and gives you extra cash to spend and invest, it also puts a chink in the armor of the companies who’ve steadily tightened the noose around consumers’ necks.

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