Momentous Bankruptcy Legislation Set to Become Law

By Jay Dismukes

NEW YORK—The House of Represent-atives in mid-April passed major bankruptcy reform legislation that is widely viewed as a victory for businesses and creditors seeking to recover debts.

On April 14, in a vote of 302-126, the House approved bill S.256, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which the Senate passed in March and which, at the time of press, was expected to be signed by President Bush. The legislation, which represents the most significant changes to the bankruptcy code since 1978, will take effect 180 days after Bush signs it into law.

Targeting abusive filings, the bill, under certain conditions, will permit the bankruptcy court to convert Chapter 7 cases, which can result in full debt cancellation, to Chapter 13 cases, which require a repayment plan. This would occur through a means test that calculates an individual’s ability to repay debts. If the filer earns more than the state median income and can repay at least $6,000 over a five-year period, he will have to enter into Chapter 13 of the bankruptcy code. If the filer earns below the median income, he can still file for Chapter 7.

The means test will not apply to disabled veterans or anyone on active duty or performing a homeland defense activity.
Through lowering the standard for dismissal, from “substantial” to “simple” abuse, the legislation will make it harder in general for people to seek bankruptcy protection. S.256 will also permit the court, bankruptcy trustee, bankruptcy administrator or any party in interest to move for a dismissal. Current law prohibits a party in interest from entering such motions.

“Americans have had enough, they are tired of paying for high-rollers who game the current system and its loopholes to get out of paying their fair share,” said principal sponsor Sen. Chuck Grassley (R-Iowa) when he introduced S.256 into the Senate Judiciary Committee in February. “All of us end up paying for the unscrupulous who abuse the system. In fact, it has been estimated that every American family pays as much as $550 a year in hidden tax as a result of the actions from these abuses. My bankruptcy reform legislation will help eliminate this hidden tax.”

Though praised by banks, credit card companies and retailers that applaud the legislation’s efforts to hold out-of-control spenders accountable for their financial obligations, others, from consumer interest groups to certain politicians, say that S.256 will come at the expense of middle- and low-income families, especially those with children, that are beset by job loss, business failure, divorce and major medical expenses.

“Last year nearly one and one-half million middle-class individuals filed for bankruptcy. Their average income was less than $25,000, and the principal causes for their filings were layoffs, health problems and divorce,” said Rep. John Conyers Jr. (D.-Mich.), one day prior to the House vote. “In my judgment, it is a grave mistake to punish these individuals while rewarding credit card companies and business lobbyists at a time when corporate greed has already destroyed the lives of millions of American workers.”

The bill also makes it more expensive to file for bankruptcy, limits the ability to file successive bankruptcies from year to year, and requires the debtor’s completion of an approved instructional course concerning personal financial management.

Alternately, S.256 permits the bankruptcy court to reduce debts by up to 20 percent if there is “clear and convincing evidence that the claim was filed by a creditor who unreasonably refused to negotiate a reasonable alternative repayment schedule.”

Look for more information on the new bankruptcy law and its impact on individuals and businesses seeking bankruptcy protection in the next issue of The Trusted Professional.