Q: Why are any changes needed to the bankruptcy system?
A: I have been working for years to make common sense reforms to the current bankruptcy system so that people who are responsible and pay their bills on time don’t have to subsidize the irresponsible actions of a few. Finally, this bipartisan bill has passed both the U.S. House of Representatives and the Senate and has been signed into law by President Bush. The passage of this bill couldn’t be more timely as the number of bankruptcies has been growing at record levels in recent years, including a 57 percent increase in Iowa since 2000. The explosion in bankruptcies comes at a steep cost to those who live with in their means and pay their bills on time. Recent estimates show that every American family pays as much as $550 a year extra for goods and services because of those who abuse the system. So, my legislation seeks to reduce the burden on responsibility citizens by making sure that those who can repay at least a part of their debt do.
Q: What does this law do to protect people in bankruptcy because of circumstances beyond their control?
A: The bankruptcy bill sets up a flexible means test to assess an individual's ability to repay his or her debts. The formula takes into account whether the filer earns more than the state median income and can repay at least $100 a month of his or her unsecured debt over five years. Legitimate expenses, such as food, shelter, clothing, medical, transportation, attorneys' fees and charitable contributions, are taken into account in this analysis. The means test also allows every consumer to show "special circumstances," so that they wouldn’t have to enter a repayment plan if they are in bankruptcy by no fault of their own. For example, expenses that are deductible from the means test include 100 percent of medical expenses, the cost of supporting or caring for elderly parents, grandparents and disabled children, and private school tuition. The means test also allows battered women to deduct domestic violence expenses and protects their privacy.
So, the bankruptcy bill preserves a fresh start for people who are overwhelmed by medical debts, loss of a job, or sudden unforeseen emergencies. It also makes sure that the poor are protected by exempting entirely people who earn less than the median income for their state. The end result is that people who earn below the median income can still file under Chapter 7, but the free ride is over for people who have higher incomes and can repay their debts.
Q: Does this bill include any provisions to help educate people about how to use credit more responsibly?
A: This legislation includes a number of important new consumer protections to help people avoid the debt spiral that often leads to bankruptcy. For example, it requires credit card companies to disclose the dangers of making only minimum payments and prohibits deceptive advertising of low introductory rates so that people know what to expect when they get a credit card. It strengthens enforcement and penalties against abusive creditors for predatory debt collection practices. It requires that credit card companies establish a toll-free number for consumers to get information on how long it will take to pay off their balance. And, it establishes new education and counseling programs to teach financial management, and punishes creditors who refuse to negotiate out-of-court repayment plans.