For more than ten years, policymakers engaged in extended debate and compromise to forge a bipartisan consensus that would bring fairness and common sense to the nation’s bankruptcy system.
In the 1990s, despite robust economic times, personal bankruptcy filings soared because debtors – assisted by unscrupulous lawyers – could too easily game the system and walk away from their debts, no questions asked.
Regrettably, the system created to help people weather misfortune in their lives frequently became a financial planning tool for those who just wanted to get out of paying their debts. Declaring bankruptcy no longer seemed to pose a stigma for those looking for the easy way out.
That’s not only unfair for those who pay their bills and live within their means. It’s also unfair because the losses from bankruptcy filings essentially slap a $400 annual “bankruptcy tax” on everyone else. Someone has to foot the bill when consumers skip out on their debts. Businesses can offset the losses when bankruptcies are infrequent, but when they occur on a regular basis, businesses have to cut employees and other expenses, or pass off increased costs to other consumers.
The better policy choice is to reduce the “bankruptcy drag” on the economy, freeing up businesses to grow and create jobs. The better policy choice is to restore responsibility, integrity, and fairness to our bankruptcy system, while maintaining it for those who are truly in need of a fresh start. That’s what is intended by the bankruptcy reform law. And, the law’s central premise – if an individual wants to file for bankruptcy and can repay some of his debt, he should do just that, repay some of that debt – is just common sense.
The new bankruptcy law also includes some unprecedented consumer protections. For example, retirement savings and education savings receive enhanced protections. Millionaires can no longer easily utilize state homestead laws to shield their wealth from creditors with lavish houses. Lenders who won’t compromise with financially-troubled borrowers can be penalized for not negotiating out-of-court settlements.
What’s more, people considering filingbankruptcy now have access to no cost or low cost credit counseling and financial education, so they can learn how to deal with their finances and become better educated consumers. Credit card companies are required to warn consumers about the dangers of making only minimum payments, and to clearly identify payment amounts. Bankruptcy mills that deceived people into filing for bankruptcy when they had other options available are now subject to new regulation. That’s because, as the Federal Trade Commission warned, bankruptcy should be a last resort, rather than the first stop in regaining one’s financial bearings.
Die-hard opponents of reform still cling to the idea that imposing filing requirements to bolster the integrity of the system and closing loopholes that riddled the bankruptcy safety net will harm debtors who need a fresh start. Although it’s too soon to issue a final grade since the new bankruptcy law took effect last October, I would argue it’s off to a good start.
Prior to the new law, bankruptcy filings reached 809,867 and 851,683 during the first six months of 2004 and 2005 respectively. In the first six months of 2006 since its enactment, 263,660 personal bankruptcies have been filed in the U.S. According to the U.S. Trustee’s Office, based upon estimates of the amount of average debt discharged, and looking at data for January through June 2006, it appears that the amount of debt discharged by individual debtors during the year after enactment of the new bankruptcy law will be about $40 billion less than the amount discharged in the prior year ending June 2005. That’s a substantial savings in my mind that gets re-directed to economic growth and the American consumers’ pockets.
It certainly seems the “Bankruptcy Abuse Prevention and Consumer Protection Act” is on track to restore fairness to the bankruptcy system. What’s more, the stricter requirements and new consumer protections ought to help boost the big economic picture and usher in an era of personal responsibility when it comes to consumer spending.
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