Don't Believe the Hype: Bankruptcy Bill Will Harm Low- and Moderate-Income Debtors

by David Yen

By the time you read this, there may be a new law that severely curtails the effectiveness of bankruptcy as a solution for the honest but unfortunate low-income debtor.

Wait a minute, you say to yourself. I hear from prominent politicians and the media that the bankruptcy bill affects only affluent deadbeats who file for Chapter 7 bankruptcy even though they can afford to pay their debts. They tell me that the only thing that the new law is going to do is to stop “them” from abusing the bankruptcy system. Bankruptcy will still be there for anyone who really needs it, won’t it?

Unfortunately the answer is “No!” The bankruptcy bill which was passed by the Senate and which is likely to become law is packed with provisions favoring creditors. Many provisions will affect any individual who is thinking of filing for bankruptcy. Some will fall especially hard on low- and moderate-income households.

Over the next few months we will be explaining how the new world of bankruptcy affects the low- and moderate-income debtor (unless by some miracle the proposed changes do not become law).

Here are some major changes that would affect low- and moderate-income households.

• Those who file will have to complete additional paperwork to determine whether they are subject to the much-discussed “means test.” The means test is supposed to prevent people from abusing the system. Although the means test applies only to households whose income exceeds the state median income, who have excess income, and are filing under Chapter 7, debtors whose income has been at the poverty level for years must complete this paperwork, as must debtors who are filing for Chapter 13. (In 1999 the median income in Illinois for a family of four was $64,042, while the poverty level for a family of four was $16,700.)
• Individuals will be forced to go to credit counseling in the six months before filing for bankruptcy. This is required even though the credit counseling industry is rife with companies providing inadequate services to their clients. It is even required for individuals who are filing Chapter 13 repayment plans and therefore do not need credit counseling.
• As a result of the new law, the fees that private attorneys will charge to file even a “simple” bankruptcy will go up substantially. Why? In addition to the increased paperwork, bankruptcy attorneys will be held liable for inaccuracies in the papers signed by the debtor; they will raise their fees to cover the cost of investigating their own clients.
• Chapter 13—the kind of bankruptcy where you propose a plan to pay back as much as you can afford and keep property that you need—will cost more and accomplish less. Debtors who paid more than a car was worth will have to pay the inflated value of the car in order to keep it. Under current law the debtor has to pay only what the car is really worth and a reasonable rate of interest.
• To encourage people to file Chapter 13, current law provides that some debts which are not discharged if you file for Chapter 7 bankruptcy are discharged in a Chapter 13. In order to get this benefit you must devote all of your disposable income to the Chapter 13 case and successfully complete a repayment plan that is at least three years long. The new law would eliminate this incentive. Many more debts would still be owed after a Chapter 13 is completed. Since interest would continue to accrue, debtors could end up owing just as much at the end of the repayment plan as they did when the case was filed.
• The law would make it easier for landlords to evict tenants who file for bankruptcy, even if the tenant pays the rent that is owed after the bankruptcy is filed.

Does this mean that if you have been thinking of filing for bankruptcy, you should hurry up and file before the law changes? Not necessarily.

First, if you live in Illinois, nothing in the bill as currently written is going to affect you until 180 days after the president signs the bill. Unless there is an emergency, you have time to get advice from an attorney who has studied the new law.

Second, the bill would impose much stricter limits on filing for a second bankruptcy. Under current law, if you file for bankruptcy, get back on course, and then suffer an unforeseen hardship, you may usually file for a Chapter 13 bankruptcy. Under the new law this option may not be there when you need it; be very sure that you really need to file bankruptcy now because it may not be available later, when you really do need it.

David Yen is the bankruptcy specialist at the Legal Assistance Foundation of Metropolitan Chicago. Contact him at 312.347.8372.