Tightening the Bankruptcy Laws in the Midst of a Deep Recession

Beginning on November 1, some people might suddenly find they are now ineligible for chapter 7 bankruptcy. Making it harder to file bankruptcy in the middle of our financial crisis may not be the best policy idea to come down the pike, but it is exactly what Congress set in motion in 2005. Here is why.

The U.S. bankruptcy law has a means test that is meant to filter "can pay" debtors into chapter 13. It's a test that was not needed--there was no evidence of widespread abuse of the bankruptcy system--and the test is not having its intended effect--the income distribution of filers has not changed. The means test begins with an inquiry that asks whether a debtor is above or below the state median income for a household of the same size in the debtor's state.

The state median income figures are periodically updated by the U.S. Census and the Executive Office for U.S. Trustees (EOUST) publishes a table that is used in the bankruptcy courts. Don't blame either the Census or the EOUST for this one. They are just doing what Congress directed. These changes happen automatically.

With the recession, incomes are going down. Thus, in half of the data points on the table, the median income that will subject a debtor to the means test has decreased. In Illinois, for example, right now a filer from a 1-person household goes through the means test if he or she has median income above $47,355. On November 1, that will change to $46,105. Also, the changes are not consistent across different sizes of households in a state. For example, in New Hampshire, the median income figures drop for 1- and 2-person households (making it harder to file chapter 7 bankruptcy) but rise for 3- and 4-person households.

Some might object that this problem is more fictitious than real. How many persons are really going to be caught out by a change of a few thousand dollars in the means test's median income figures? Well, maybe not a lot, but with us headed toward at least 1.5 million bankruptcy in 2010, also not just a few. Regardless of the number of people who are affected by the change, what concerns me more is the symbolism of making personal bankruptcy less available during a time of economic crisis. These sorts of changes feed the perception that the government will help out large financial institutions but the average Joe or Jane.

There is a lot of misinformation out there for persons contemplating bankruptcy, and I would not want this post to add to that problem. If you are thinking about filing bankruptcy and found this post, there is no reason to panic. If you are well below the state median income, this change will not affect you. Even debtors who are above the state median income often are eligible for chapter 7 because the expenses are high enough to qualify. But, if you have an income near your state's median, you might want to visit an attorney before this change goes into effect. You can find the post-November 1 median income figures here.

And a hat tip to the Credit Slips reader who wrote me and reminded me that these changes were coming.

Comments

[Mark]

The change is fairly significant for us down here in Florida. It is a $103/month change (decrease) for single person households. As a result, I've had to call two of our "debtors-in-waiting" (their reasons for waiting vary), who have marginal means tests already, and advise them that they need to go this month. I just finished a meeting with a third and this issue was the straw that broke the camel's back, and there is a fourth I will be talking to later today. So, we have at least four would-be debtors, right now, in our two-man shop that very well could be impacted.

[AMC]

I've seen several earlier comments on this change -

Bankruptcy Means Test Irony: As Incomes Drop, More May Have To File Chapter 13

http://www.bankruptcylawnetwork.com/2009/10/11/bankruptcy-means-test-irony-as-incomes-drop-more-may-have-to-file-chapter-13/

Will You Qualify For Chapter 7 Bankruptcy After Halloween?

http://www.bankruptcylawnetwork.com/2009/10/10/bankruptcy-eligibility-test-changes-november-1/

US Median Income is down so poorer people are denied relief!

http://www.bankruptcywatercooler.com/viewtopic.php?f=2&t=331

It does seem patently unfair, particularly when the structural effect of the Means Test is factored in. Today, people are hitting even harder times because they've lost their jobs, but they can't seek immediate relief because their eligibility is being evaluated based on a six month lookback period to better times, before they lost their employment.

[Patches]

This is nothing new its just that more and more people will feel it now. Our oilfield workers have been experiencing the very same thing. Great pay; no need for even a high school diploma and absolutely no way of getting a job that pays anywhere close to what they had been getting in the oilfield when they are let go. 50-60k per year with no degree but when its gone, you have to wait months to file chapter 7? Usually though its not the unsecured stuff that's pressing but the unsecured "Chihuahuas" are barking trying to scare debtors into paying them instead of say.... a MORTGAGE!

[Bankruptcy]

I'm not sure about the US but I work in the insolvency industry in Australia and there is widespread abuse of the bankruptcy system. It's too easy in Australia for people to file for bankruptcy, and the consequences are very minor. While dificult to draw direct comparisons I thin filing for bankruptcy should be difficult.

[atlanta bankruptcy]

"The change is fairly significant for us down here in Florida. It is a $103/month change (decrease) for single person households. As a result, I've had to call two of our "debtors-in-waiting" (their reasons for waiting vary), who have marginal means tests already, and advise them that they need to go this month. I just finished a meeting with a third and this issue was the straw that broke the camel's back, and there is a fourth I will be talking to later today. So, we have at least four would-be debtors, right now, in our two-man shop that very well could be impacted. "

I think the change is pretty significant to many of us.

[Patches]

Well, personally I don't think there should be any "consequences" for filing for Bankruptcy. The process alone is usually pretty traumatic for debtors. The goal of bankruptcy is not to punish but to rehabilitate. Capitalistic economies need rehabilitated debtors otherwise those economies are left with a deteriorating pool of borrowers. Lets face it, there are only so many people you can lend to in any one country. The alternative to consuming and economies based on it is producing. It seems as though in the US anyway we are all caught up in consuming and leaving producing up to 3rd world countries that pay less in wages.

[John Forbes]

These new rules will make it tough on a few. But most of the time someone files for bankruptcy, they are way under water. The new rules will mostly make it harder for people to file because it's the easy way out.

[Bankruptcy Bill]

A bankruptcy haiku:

Economy down
As winter approaches means
Means Test is just mean.

See, e.g., http://bankruptcybill.us/2009/08/29/bapcpa-man-6-unemployment-median-income-and-the-means-test/

-Bankruptcy Bill
http://bankruptcybill.us

[bankruptcy laws]

We want to know where the best Lawyers and Attorneys are at. Why waste time? Check out the best Lawyers and Attorneys in your area here first and less time finding the right place for you!

[David hogard]

For businesses, relying on issuing credit, the new personal bankruptcy law is doing great, reducing personal bankruptcy claims. In other way lawyers working with the actual people filing for bankruptcy say that the new law is acutely flawed because it puts more financial burdens on already bust clients.
Under the new law it has become an obligation that the person filing bankruptcy obtains credit counseling both before and after filing for which that person will be charged.

http://legallaw.sosblog.com/admin.php?ctrl=posts&tab=posts&blog=1&post_id=45#form_comment