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New Bankruptcy Legislation Passes

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The top story today on Yahoo! Finance is the passing of the new bankruptcy bill (S.256, Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) that restricts who is eligible for Chapter 7 bankruptcy, which dissolves all your debt, and instead forces people into Chapter 13, which sets up a payment plan. Some have labeled this business friend, which it is, but I contend that it’s not necessarily anti-consumer. The rules essentially say that if the person filing for bankruptcy is above the state’s median income and can pay at least $6,000 over five years must file Chapter 13 and not Chapter 7. I believe that is very reasonable especially when you figure how the debtor’s income is actually calculated (explained below).

Credit cards have afforded people the ability to spend beyond their means and rack up bills that they couldn’t possibly ever pay. The filthy rich as well as the dirt poor do this and they (usually the filthy rich) find states with homestead exemptions that protect some of their assets from seizure in a bankruptcy case. People need to be taught responsibility and this is the first step. Think of the couple in the March 7th episode of Dr. Phil, Maria and Brian racked up $400,000 in debt. FOUR HUNDRED THOUSAND DOLLARS. A direct quote: “We knew that we could not afford the vacations we were taking. Unfortunately, we relied on the line of credit to just make the problem go away.”

I do have compassion for those with medical bills (and not over-spending bills) that put them in a particular financial situation. That is a case of unfortunate bad luck and not poor financial planning. But if you can pay a little back, it’s better than axing the entire debt all together. The state median income level test is one that I believe is fair.

The actual rule to determine is abuse is the debtor’s monthly income (minus “necessary health insurance, disability insurance, and health savings account expenses for the debtor, the spouse of the debtor, or the dependents of the debtor… average monthly payments on account of secured debts… debtor’s expenses for payment of all priority claims (including… child support and alimony claims)”) multiplied by 60 (5 years) isn’t less than $6,000. So really, it’s not $6,000 but some value greater than that because of all the mitigating circumstances such as child support. So the rule isn’t as tight as you may think.

The bill is designed to prevent abuse of the bankruptcy system and I believe it will be doing it. Even if the people don’t fully understand it, just knowing that bankruptcy, while it will murder your credit, isn’t a quick and easy escape hatch will force folks to face reality. You can’t rack up $400k in debt trying to keep up with your neighbors and you can’t shirk responsibility (something we try to teach children) through court. The bill isn’t heartless and it doesn’t ignore sensitive situations, there are clauses for child support and payment of secured debt. Look over the bill and come to your decision, don’t let the media bias form an opinion for you. This bill isn’t evil and it isn’t anti-consumer, it’s like your mom slapping your hand when you grab that extra cookie, it’ll be good for your character and you’ll thank them later.

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