Troubling Bankruptcy Fix
I'm posting this for you from an editorial in the Providence Journal.
Troubling bankruptcy fix
01:00 AM EST on Tuesday, November 8, 2005
Across the country, thousands of people rushed last month to declare bankruptcy. In many cities, that meant standing in long lines. It also meant long hours for bankruptcy lawyers, who struggled to meet deadlines ahead of the change in the law, on Oct. 17.
The first significant overhaul of the bankruptcy law in a quarter-century makes it harder for people to clear away debt, under Chapter 7. Instead, more debtors will be forced to reorder their affairs under Chapter 13, which will oblige them to set up a five-year repayment plan. Within six months, these filers will also have to get credit counseling and financial education. Declaring bankruptcy will cost more, too: Because lawyers are required to do more paperwork, their charges are expected to rise, probably by a few hundred dollars per case.
It is clear who the winners in this setup are likely to be. Along with lawyers, credit-counseling agencies should profit. In fact, the law almost looks like a windfall of new business for them -- without money from Congress to pay for additional counseling. If the credit industry fails to up its contribution, counseling agencies are apt to get their piece of the action from the people seeking help.
Already, some counseling agencies have been accused of aggressively steering people into debt-management plans, and away from other options. Under these plans, according to a New York Times report, the debtor pays the agency with a single monthly check. After taking its slice, the agency is expected to divide the rest among creditors. Often, though, the debt never diminishes, even after years of payments.
The Internal Revenue Service is threatening to revoke the nonprofit status of some of these agencies. But it seems unlikely to get far, especially when there are so few to take on the expected steep increase in demand.
The other winners, of course, are credit-card companies, banks and merchants, all of which lobbied hard for the new law. The fact that Congress has done nothing to curb industry tricks to hide usurious credit-card interest rates and fees only magnifies the unfairness of the new law. Easy credit (and deceptive marketing) is what drove many Americans into debt in the first place.
The losers under the new law will largely be middle-income Americans: It targets people who make more than the median in their states. Often, though, these are people who have been hit with job loss, serious medical bills or divorce. Certainly, careless spenders ought to make amends, and it is clear that more prudent consumers are the ones who have paid the price of such profligacy, through higher costs for goods and credit. Unfortunately, the new bankruptcy law punishes the unlucky as well as the reckless.
