Thursday, April 14, 2005

The Bankruptcy Bill

Hi, I'm new at this, so you may have to excuse this first post. I never saw myself setting up my own blog, but my thoughts upon the passage of the Bankruptcy Bill have changed that.

For those of you who don't know, the Bankruptcy Bill passed the House of Representatives today. Earlier, it had passed the Senate. It has not been signed into law yet, but that will be only a matter of time.

Simply put, the Bankruptcy Bill seems to me to be a very bad idea. With all due respect to the members of Congress, I doubt that most of them have ever set foot inside a Bankruptcy Court, and the ones who have probably have not done so in years. I am an attorney who devotes a substantial portion of my practice to this area. On a personal level, I have also experienced a significant degree of financial hardship in my life. I think I know more about the unintended consequences of this bill than do many of the members of Congress, who may be responding to nothing more than campaign contributions from the credit industry.

It seems to me that the most troublesome provision of all is with respect to expenses. In all likelihood, most bankruptcy debtors will now be shoehorned into a "one size fits all", or nearly all, category of expenditures taking into consideration only the number of the dependents and the geographic area in which they live. Yes, it may be possible for a debtor to argue certain factors which justify a deviation from the standard expenses, such as substantial medical treatment which a dependent requires. But that will mean more hearings and more attorneys' fees, so filing bankruptcy will likely become more expensive than it is now. Also, bankruptcy judges, the overwhelming majority of whom, from personal experience, are dedicated professionals who display compassion both toward the debtors who come before them as a result of unfortunate circumstances as well as their creditors, will now be placed in the unfortunate position of having to decide whether certain medical care which a debtor seeks on behalf of himself or his dependents is reasonable. Given the relatively low threshold which triggers the requirement of a Chapter 13 filing (availability of as little as $100 per month to pay creditors), there may be some pressure on bankruptcy judges to scrutinize debtors' budgets extremely carefully.

Another tidbit on expenses: who do you think will be in charge of keeping track of average expenses by dependents and geographic area? If you said the IRS, give yourself a gold star. This is ironic, to say the least, given that many of the most fervent supporters of the Bankruptcy Bill in Congress have also been among the harshest critics of the IRS. But why let consistency get in the way of a photo op? And just a show of hands, please: who out there thinks that tasking the IRS with tracking this additional data is a good idea?

You might be inclined to think that the proposed changes are a good thing. Of course, there are a lot of rumors out there, many of them without substantiation. My experience has been that, public opinion to the contrary notwithstanding, the overwhelming majority of people who do file bankruptcy do so only as a last resort. Most have experienced some sort of financial catastrophe prior to filing bankruptcy: prolonged unemployment, divorce, failure of a small business, death or serious illness of a family member, or the like. Another myth is that bankruptcy is a refuge of "deadbeat dads" who try to avoid child support. This is simply untrue, or at a minimum, any person seeking to do this will meet with failure. Child support is NEVER dischargeable in bankruptcy, under ANY circumstances. In fact, bankruptcy actually makes it easier for fathers under difficult financial circumstances to pay child support, since they can receive a discharge of most other debts. In short, while there may be some room for reform of the bankruptcy system, this bill goes too far. It throws the baby out with the bath water.

Of the people I have discussed this with, almost to a man, bankruptcy practitioners, bankruptcy trustees and even (in private, of course) bankruptcy judges think this law is a bad idea. The one silver lining in all of this is that the new laws won't become effective until 180 days after the President signs them. So my advice to anyone who is on the fence regarding bankruptcy is to file now, while the current laws are still in effect. Ordinarily, I would not give such blanket advice without looking more carefully at one's financial circumstances, but in this environment, I think those who file bankruptcy but delay in doing so will live to regret that decision.