LEXIS-NEXIS® Academic Universe-Document

LEXIS-NEXIS® Academic

September 20, 1999, Monday, Metro Edition

SECTION: BUSINESS; Pg. 3D

LENGTH: 1354 words

HEADLINE: Bankruptcy bill needs reform;
Growing chorus of opponents finds Senate bill too bureaucratic, too creditor-friendly and too hard on women and children.

BYLINE: Ronald J. Lundquist

BODY:
"People say 'law,' but they mean 'wealth.' "

            _ Ralph Waldo Emerson

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     Lobbyists for wealthy credit-card companies are strongly pushing Senate Bill 625, which is currently in the Senate Judiciary Committee and could come to the Senate floor this week. The bill will make it very difficult for insolvent consumers to file bankruptcy. This proposed legislation is unnecessary, unenforceable and cold-hearted. It should be rejected.

     First, some background. Bankruptcy is guided by federal law, and the United States Bankruptcy Code allows two types of consumer bankruptcy, Chapter 7 and Chapter 13. (Business bankrupcies, such as Chapter 11 filings, do not figure as prominently in the pending legislation.)      Chapter 7 is the most common consumer bankruptcy. A Chapter 7 bankruptcy typically "discharges" or eliminates credit-cards, installment loans, medical bills and other unsecured debt. The law exempts necessary possessions from seizure, allowing an insolvent person to keep basic household items. If a debtor is current on house or automobile payments, and is able to continue payments, those debts are "reaffirmed," and the debtor is able to retain possession.

     Some types of debt cannot be discharged in a Chapter 7 bankruptcy. For example, taxes, student loans and child support cannot be wiped out.

     Determining whether a person should file a Chapter 7 bankruptcy is a complicated analysis. Factors to be considered include the debtor's income, expenses, assets and liabilities. Upon the filing of a Chapter 7 an "automatic stay" comes into place, which halts all creditor activity to collect debt, including most civil actions and garnishments.

     Chapter 13 allows the establishment of an affordable plan to repay the consumer's creditors. In most cases a consumer will file a Chapter 13 in order to retain possession of a home or automobile that is threatened by foreclosure or repossession. Chapter 13 also allows debtors to repay taxes and child support. In some cases a debtor will file a Chapter 13 to pay back credit card and other consumer debt when the debtor's finances do not render him or her insolvent.

     The payment a debtor makes in a Chapter 13 bankruptcy is usually the amount of the debtor's "disposable income," which is the difference between a debtor's after-tax income and his or her "necessary expenses."

     A Chapter 13 is usually more expensive for a consumer than a Chapter 7 because it requires more time and labor to file.

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Why 'reform' will hurt

     There are several reasons that the Senate bill should be rejected:

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     1. Bankruptcy filings are decreasing. Credit card companies would have us believe that bankruptcy filings are climbing at an astronomical rate. In fact, bankruptcy filings have been declining in Minnesota, as well as nationwide. Cases filed in Minnesota in the six months ended June 30 dropped 13 percent compared with the same period in 1998. Personal bankruptcy filings nationwide dropped 6.5 percent during the same period.

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     2. The bill would be expensive to implement. The Congressional Budget Office estimates that implementation of the bill would cost $357 million by the year 2004. This expense means more government, more bureaucracy and a waste of money to fix something that is not broken.

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     3. The bill burdens attorneys. Bankruptcy attorneys would be required to make 'reasonable inquiries" to confirm that information received from their clients is truthful. No guidelines are given as to what constitutes a "reasonable inquiry." Bankruptcy attorneys already work to ensure that bankruptcy petitions are accurate, requesting such things as pay stubs to confirm income and copies of bills and other papers to confirm expenses.

     The bill would sanction attorneys for submitting inaccurate information. To avoid penalties, attorneys would need to verify information regarding a client's creditors, assets, liabilities, income and expenses. Would attorneys be required to run a title search on every client to make sure they own no real property? Would they be required to hire independent appraisers to determine the value of personal property? The language of the bill is too uncertain, too laden with liability for attorneys who already do their best to present the facts as they are given. The result will be to drive lawyers from practicing bankruptcy law, benefiting creditors.

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     4. The bill is arbitrary and capricious, ignoring a consumer's basic living expenses. The bill would require a "means test" to determine if consumers qualify for a Chapter 7 bankruptcy. Currently, a consumer's actual expenses are used to determine eligibility. (Generally, a consumer is eligible if necessary expenses _ such as food, shelter, car loans and insurance _ are greater then after-tax income.) For example, if a consumer actually spends $650 on food for a family of four, this is the amount reported in the bankruptcy filing. The pending bill throws out a consumer's actual expenses.

     Instead, Internal Revenue Service collection guidelines would be used. These guidelines are Dickensian. A family of four with an after-tax income of $830 or less would be allowed to spend just $343 on food a month. Anyone who has a family of four knows this is unreasonable.

     The bill is arbitrary because a family of four making between $2,500 and $3,329 monthly would be allowed to spend $558 on food. Evidently the bill's drafters are unaware that nutritional needs are not linked to income.

     The bottom line is that fewer consumers will be able to file a Chapter 7. Instead they will be pushed into Chapter 13 bankruptcy. Our federal courts will become collection agencies for credit card companies.

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     5. Creditors do not need the bill. A great creditor falsehood is that the legislation will allow creditors to rein in interest rates, which otherwise must be raised to cover losses due to bankruptcies. This would be a good argument except for its lack of truth. Credit card companies are enjoying huge profits. In the second quarter of 1999 Citigroup, a major issuer of credit cards, reported that operating revenues rose nearly 11 percent to $14.3 billion, while operating earnings jumped more than 21 percent. Greed is the motivating factor behind the bill, not economic necessity.

       Debtors' attorneys are not alone in their opposition to the current bill. More than 100 bankruptcy court judges have expressed to Congress their strong disapproval of the bill. And legal scholars have also sounded the alarm. Citing the "rigidity" of the proposed means test and the adverse impact on women and children _ both as debtors and creditors _ 92 professors from the nation's leading law schools urged Senate lawmakers to reject the bill in its current form.

     Scholar Derek Bok has written, "There is far too much law for those who can afford it and far too little for those who cannot."

    Such is the case with Senate Bill 625. This bill should be rejected. It is unnecessary, expensive and will be administered unfairly.

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The author

Ronald J. Lundquist is a bankruptcy attorney with the law firm of Hoglund, Chwialkowski & Greeman in Roseville. The firm, one of the largest bankruptcy firms in Minnesota, exclusively represents debtors.

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Personal bankrupcty filings 1990-99#

     Has the 1990s flood of personal bankruptcies begun to recede? Quarterly statistics through June show that personal bankrupcty filings nationally dropped 6.5 percent compared with the first six months of 1998. If that trend continues, filings will decline an estimated 6 percent year over year. In Minnesota, personal bankruptcy filings peaked in 1997.

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U.S. total

1990     718,107

1998   1,398,182

1999# 1,314,364

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Minnesota total

1990      13,329

1997      17,747

1999#     15,122

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# Estimate is based on annualizing the figures for the first six months of 1999.

Source: The American bankrupcty Institute; U.S. Bankruptcy Court.

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(See microfilm for chart.)



GRAPHIC: CHART; PHOTO

LOAD-DATE: September 21, 1999