BANKRUPTCY UPDATES

• Minnesota Distillery of Fine Vodkas Files Chapter 7 Bankruptcy (February 10, 2012)
• Court Approves Newspaper Magnate Lee Enterprises’ Bankruptcy Plan (February 07, 2012)
• Suspected Felon Filed for Bankruptcy Shortly Before Untimely Death (February 09, 2012)
• Ireland Overhauls Bankruptcy Laws (February 06, 2012)
• IL State Representative Files for Chapter 13 Bankruptcy (February 08, 2012)

New Bankruptcy Law Fights Phantom Problem, Favors Lenders

The credit industry—banks, credit card issuers, and the various related business that thrive on lending consumers ever increasing sums of money—got an early Christmas present in October 17, 2005.

That was the date when the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) became the law of the land—a law that may make it harder for many financially troubled consumers to obtain a fresh start under the U.S. bankruptcy laws.

It was a long fight. The credit industry has attempted for years to tighten the screws on consumer debtors by making the bankruptcy laws much stricter.

Congressional democrats, however, repeatedly rejected these attempts. Finally, however, under the current Republican dominated Congress, the law was passed, and now the consequences are being felt.

Early cases construing BAPCPA are showing just how draconian the law is.

For example, under the new bankruptcy law, in order to file a bankruptcy petition, the debtor must first obtain credit counseling from an approved credit counseling agency.

Yet, in many cases, access to these counselors has been nearly impossible as only a few agencies have been approved to provide the counseling. As a result, courts have already dismissed bankruptcy cases by individuals who unsuccessfully tried to obtain credit counseling.

Also, the new bankruptcy law requires individuals to submit detailed financial records explaining their incomes and expenses before they can proceed with their case.

Yet, thousands of individuals in the Southeast who have been devastated by Hurricane Katrina and the other storms in the fall of 2005 likely lost these records and may have had the courthouse doors shut against them as a result.

The law, many argue, is particularly unfair because it seeks to remedy a problem that may not exist.

Although the law purports to stop bankruptcy fraud and abuse by unscrupulous debtors trying to avoid the claims of their creditors, the reality is that bankruptcy fraud is a small part of the problem.

The real problem—which the law does not address—is that most bankruptcies are not the fault of debtors. Research indicates that most bankruptcies are caused by medical problems, job losses and divorce, not unscrupulous debtors.

The new bankruptcy law does nothing to address this issue, and only makes it harder for individuals in these circumstances to obtain the fresh start promised to them under the bankruptcy laws.

The credit industry may, however, have gotten a taste of its own medicine.

Some large banks have reported millions of dollars in losses due to the huge number of people filing bankruptcy that occurred before the new law went into effect, and many bank executives are now acknowledging that the financial benefits of the new law will take much longer to materialize than they originally had hoped.

And if consumers use the new law to reduce their reliance on the easy credit thrown at them by these banks over the years, the credit industry may be in for a rude awakening.

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