|
Last Updated: 03/18/2005
The Rockbridge Report is produced
under the supervision of the Dept. of Journalism and Mass Communications
at Washington and Lee University.
Reporting supervisors: Prof. Doug Cumming
Technical supervisor:
|
Bankruptcy bill moving through Congress
By Lisa Baratta March 18, 2005 As a major change in bankruptcy policy makes its way through Congress, area experts disagree about whether the measure will stop the abuse of credit card spending or will be a crushing blow to the poor. Last week, the U.S. Senate passed the bankruptcy bill, which limits consumers’ ability to completely free themselves from their debts. The House will vote on the bill in April, and if passed, the changes will take effect this fall. This legislation marks the first major change in bankruptcy policy in a quarter of a century, although similar bills have been introduced in Congress for the past decade. The credit card industry has been the primary force lobbying for changes in bankruptcy policy. According to Professor Dennis Garvis of Washington and Lee who is also a retired bankruptcy attorney, that industry has consistently had the lobbying resources in place, and they are finally finding success. The Senate has been divided on this issue primarily on party lines, and the Republican majority has managed to deny almost all of the proposed amendments moderating the impact of the bill. Several amendments were withdrawn or simply not offered when it became obvious that all would suffer the same fate. “When the political conditions were right [credit card company lobbyists] finally got a bill that people were willing to…vote in favor of,” said Garvis. There are five chapters of bankruptcy, the most common being Chapter 7, which is liquidation. This is available to all entities--businesses and individuals. Liquidation allows for people who file for bankruptcy to be relieved of nearly all debts, but in return they must offer their property to pay back what it can. The remaining four chapters of bankruptcy fall under “reorganization,” the most common being Chapter 13. As the name suggests, under these chapters, the debtor reorganizes his debts with a plan to pay them back over time. The bill is a response to an increase of about 72 percent in bankruptcy filings in the United States since 1995, according to the American Bankruptcy Institute. “Approximately 70 percent of all individual bankruptcies are filed under Chapter 7, even though a number of these debtors have the ability to operate under a repayment plan,” said John Warner (R-Va) through his press office. Both Warner and George Allen (R-Va) supported the bill. The bill is designed to reduce the number of people filing Chapter 7 bankruptcies, particularly those who have enough income to pay back their debts through reorganization, specifically Chapter 13. Therefore, the direct result of this legislation will be an increase in the number of people filling Chapter 13 reorganization. “The law should…compel them to repay the debt to the extent that they can,” said Garvis. However, Shenandoah Valley bankruptcy attorney Bradley Pollack has not seen any abuse of the system in the past. He said that by the time cases get to him, people need bankruptcy as an option. “My trust is in people that work in the system,” said Garvis, who believes judges can tell the difference between people trying to cheat the system and those who really need the protection of bankruptcy. The bill will use a means test that compares a consumer’s income and expenses before he is able to declare bankruptcy. The major criticism of the bill is that low to middle income families who unexpectedly experience high medical bills or job loss will be faced with bills they cannot pay. “I…think the intent of the bill is good because it will increase the amount of money paid to creditors but I fear that the bill might not be as effective in practice,” said Rebecca Connelly, a local bankruptcy trustee. Although a 10 to 30 percent increase is predicted nationally for those who will no longer qualify for Chapter 7, Connelly estimates that Rockbridge County and surrounding areas of Virginia will only see a 10 to 15 percent increase. She bases this prediction on her own survey of the cases being filed in this area, and it appeared that only 10 percent of them would fail the proposed means test. Connelly believes it is a misconception that this will target low income individuals and those with exceptional circumstances because the bill allows a "safe harbor" for those people to continue to qualify for Chapter 7. Garvis believes that some of the safe harbor provisions will be difficult to apply because different states have different exemption and protection provisions that play a role in bankruptcy, as well as different standards of living. He thinks that attempting to apply the same rule to people in Lexington as well as Los Angeles, for example, has the potential to create problems regardless of the protection efforts. Garvis also acknowledges that the credit card industry is not innocent of the abundance of bankruptcy filings. If they were not extending credit in the way that they do, he said, “You wouldn’t have as… many potential candidates to file bankruptcy.” The companies are beginning to want more of these people to have to pay back more of their debt rather than receive a clean discharge from it. Pollack opposes these changes, primarily for that reason. “It seems to me that this is not the answer. To me, tightening up credit is the answer,” said Pollack. Pollack advocates Chapter 7 because of its simplicity and believes that changing proceedings into a Chapter 13 will be “an absolute nightmare.” He believes that the Senate’s bankruptcy reform is prosecuting the irresponsibility of the entire system because credit companies want to burden their consumers for the rest of their lives after giving them “easy money.” “I feel that this measure will reform our bankruptcy laws in a way that is fair to both debtors and creditors,” said Warner. “And one that will stop bankruptcy abuse.” |
|