Nassau Lawyer

Written by Craig D. Robins, Esq.

The Bankruptcy Reform Movement. For each of the past five years, there has been a movement in Congress to toughen the existing bankruptcy laws. During this time, bankruptcy filings increased from 718,000 in 1990 to an average of about 1,400,000 filings per year in each year since 1998. The bankruptcy reform movement intensified at the height of this increase in1998 when Congress apparently decided that it was time to enact new, more stringent bankruptcy laws designed to make it more difficult for consumers to file for Chapter 7 relief. The reform movement has run a very rocky course ever since.

The push for bankruptcy reform has been fueled by the banking and credit card industries who have pumped tens of millions of dollars into lobbying efforts in an effort to persuade Congress that the current bankruptcy laws had become too lenient and that a high percentage of filers were abusing the bankruptcy system because they had the ability to repay some of their debts.

In general, the bankruptcy reform movement seeks to prevent a large number of consumers from filing for Chapter 7 relief, which currently enables them to eliminate their credit card debts in full. The proposed new laws require that many of these consumers file a Chapter 13 payment plan bankruptcy instead, forcing debtors to pay off a portion of their debts over a period of time. If passed, the provisions of the new reform legislation will result in the most sweeping overhaul of the Bankruptcy Code in more than twenty years.

What Reform Means to Consumer Bankruptcy. The essence of bankruptcy reform is to require consumers to meet certain minimum standards to qualify for Chapter 7 filing. For example, a consumer debtor’s income would need to be less than the state’s median income in order to qualify for Chapter 7. Also, the new legislation would disqualify consumers from Chapter 7 eligibility if they have the ability to pay at least $10,000 or 25 percent of their debts, whichever is greater, within three to five years. Another prerequisite for filing is that the consumer get credit counseling from an approved nonprofit organization. In addition, the new laws will make more consumer credit debts nondischargeable. Finally, the proposed legislation seeks to hold debtors’ attorneys liable for their clients’ conduct. Debtors’ attorneys will become responsible for conducting a reasonable investigation into the circumstances giving rise to the filing of the bankruptcy.

Opponents of the bill have argued that it does nothing to end the abuses of banks and credit card companies that flood the mail with solicitations for easy credit and indiscriminately increase lines of credit without conducting due diligence to ascertain if the customer can afford it. Furthermore, some families deemed too rich to qualify for Chapter 7 could be too poor to afford the necessary repayment schedule in a Chapter 13. Credit card companies have also been making it too easy for college students to begin racking up debt before they even graduate. The law also imposes additional obligations on those seeking to file Chapter 13. Virtually all consumer bankruptcy attorneys and trustees are against bankruptcy reform, as are most bankruptcy judges.

Reform Efforts During the Clinton Era. President Clinton, during his administration in the 1990’s through 2000, made it clear that he was not enthusiastic about any major bankruptcy overhaul and declared that he would be hesitant to sign any new legislation.

In 1999, the House passed a bankruptcy amendment bill. The Senate then passed this bill the following year. In 2000, after both houses of Congress overwhelmingly passed the bankruptcy reform bill, Clinton vetoed it on grounds that it would hurt ordinary people and working families who fell on hard times. He did this during his final weeks in office. Generally, Republicans are solidly in favor of bankruptcy reform, while Democrats are somewhat split.