New Bankruptcy Law

GWEN IFILL:

Beginning today, Americans who want to declare bankruptcy will find the bar considerably higher. Under the new law, anyone who files for Chapter 7 bankruptcy will have to meet a new income means test before their debts can be wiped out. More will be forced to file under Chapter 13, and repay debts over a period of time.

As today's deadline approached, many consumers have scrambled to file under the old rules, leading to long lines at courthouses across the country; 200,000 people were expected to file for personal bankruptcy just last week, typically, that number is closer to 30,000.

What effect will these rules have on the average consumer? For that, we turn to: Todd Zywicki, a professor of bankruptcy law at George Mason University; and Travis Plunkett, the legislative director at the Consumer Federation of America. Welcome, gentlemen.

GWEN IFILL:

Professor Zywicki who does this law hurt? Who does it help?

TODD ZYWICKI:

Gwen, I think this law helps all of the consumers who actually live up to their responsibilities and pay their bills. This bill leaves unaffected those who comprise the majority, the most bankruptcy filers who are those who are just down on their luck, have lost their job and had some sort of difficulty that has knocked them down and they just need a hand up.

Who this bill hurts is the people out there, the rising epidemic of fraud and abuse that we've seen in the bankruptcy system over the past 20 or 25 years. It hurts the people who are trying to conceal assets from their creditors, it hurts the deadbeat fathers who are trying to evade marital support obligations through bankruptcy and it hurts people who want to file bankruptcy and walk away from debts that they can repay by requiring them to pay back what they can as a condition for bankruptcy.

GWEN IFILL:

Mr. Travis Plunkett, was this fraud and abuse that Professor Zywicki talks about, was that rampant?

TRAVIS PLUNKETT:

Well, as a matter of fact, the evidence of fraud and abuse is that it's fairly minimal. Creditors who wrote large parts of this bill tried to make the case in the late 1990s that fraud was out of control or that abuse of the system, that is, people who could afford to pay part of what they owe were instead going to bankruptcy and wiping away that debt was high as well.

They weren't able to make that case. In fact, a lot of those studies have been discredited by the Congressional Budget Office, for example.

So what we're left with are numbers in the 3 to 4 percent range. The best objective study I know of looks at this and says about 3 to 4 percent of those people who are filing Chapter 7 bankruptcy — that's the part of bankruptcy most people are familiar with — could afford to pay some of their debt. So because the creditors behind the bill exaggerated the amount of abuse, they've constructed a piece of legislation that doesn't just affect those who are abusing the law. It's not a narrow piece of legislation.

GWEN IFILL:

But doesn't this legislation basically say if you can repay you must?

TRAVIS PLUNKETT:

It's a fine principle. And you won't find anybody disagreeing with it. It does far more than that though. It says that everybody filing for bankruptcy is going to pay more for bankruptcy. The filing fees are up. In all likelihood the attorney's fees will be more expensive. It then erects a number of new barriers, dozens of new barriers.

There isn't just a means test. There are new requirements, for instance, regarding how you can reaffirm debts, existing debts with your creditors so that you end up paying your creditors what you owe them. There are new costs. There are new creditor motions. Creditors will be able to file new legal motions to challenge debtors on a technicality based on minor problems with the paperwork. It sets up a new system that is essentially a trap for many legitimate debtors.

GWEN IFILL:

So, Professor Zywicki, say I'm the owner of a floral shop who's hit bad times and wants to find a way to erase my debts and start anew. How high is the bar now for me to be able to declare bankruptcy?

TODD ZYWICKI:

The bar is not set that much higher. There's also the issue of individual consumer bankruptcies versus business bankruptcies. But to give you a flavor of the way in which this really helps everybody, I spoke to a supporter of the legislation who owns a small lumber business in southern New Jersey. He's already up against the wall because he has a Home Depot in the next town over.

And he said, Professor Zywicki, I want you to know I support bankruptcy reform because if a guy comes in and buys some lumber for a new deck and pays five hundred or a thousand bucks and walks away and sticks me with the bill, that hits my bottom line. And I have to pass those prices on to somebody else, to some other consumers or it's going to take another business, another small business off the radar screen.

GWEN IFILL:

Is it true that the credit industry was behind this bill?

TODD ZYWICKI:

Gwen, I think there's always special interests involved in politics. Credit industry supported this. As you might guess, the bankruptcy lawyers opposed it. Fewer bankruptcies means less money for bankruptcy lawyers.

What we see about the politics is that 70 percent of Congress supported this bill. Every Republican, 40 percent of the Democrats supported this bill. There was overwhelming bipartisan support for this bill. There were special interests on both sides: Yes, consumer creditors. Yes, on the other side you had bankruptcy lawyers. And I think what this was, was a principle by Congress reaffirming that if people can pay their debts, they should and that this is about personal responsibility not about special interest politics.

GWEN IFILL:

Mr. Plunkett, are high-income earners — high-income filers in this case — affected differently than low-income filers?

TRAVIS PLUNKETT:

Higher income filers and we're talking about filers in terms of income per year $40,000 per year to $60,000 per year so anybody making more than their state's median income will fall into this category. They will have to pass this new means test that you mentioned for Chapter 7.

And the problem isn't so much from my point of view with the very high income debtors. It's with those who are on the bubble — families who are earning 40, 50, 60 thousand dollars a year, have high expenses, have insurmountable debts because they've lost a job; they've been hit by high medical bills or they've been through a divorce. Those are the three big causes of bankruptcy.

And then they're going to have to meet the many new requirements to prove that they are not abusing the laws. And that's once again in a situation where 3 to 4 percent of the time abuse occurs. So my point here is that the law overreaches. It doesn't just target a handful of abusers. It hurts everybody who is filing for bankruptcy in one way or another.

GWEN IFILL:

If you're suddenly thrown into dire financial straits, say you're a victim of a hurricane or a survivor of a hurricane and you're trying to figure out how to get started again, does this law change your ability to start anew?

TODD ZYWICKI:

No, in the end it doesn't change it. If you takes the means test, for instance, it allows the court to consider special circumstances such as a hurricane. Your house and job is wiped out. With respect to paperwork reduction, Section 521-E2B says that the court can waive the right to file some of these paperwork.

Every single thing in the bill tries to control fraud and abuse but it also retains sufficient discretion for a bankruptcy judge in a situation where circumstances out of the debtor's control, for instance, such as a hurricane so that the judge can still grant bankruptcy relief.

GWEN IFILL:

Are those people protected, Mr. Plunkett?

TRAVIS PLUNKETT:

Well, this is another example of how the law games the system — to prove special circumstances the burden is already under –on you under this new law to show you're not an abuser. That's like showing that you don't beat your wife.

It's a legal standard that's a lot higher to meet. It makes it more difficult for these people who have been hit by an unforeseen emergency to get Chapter 7 bankruptcy relief.

GWEN IFILL:

The new law also calls for credit counseling to steer people into credit counseling before they can declare bankruptcy. How does that change what's happening before?

TODD ZYWICKI:

It would require a debtor on undergo credit counseling in the period preceding bankruptcy to see whether or not they can work out a voluntary repayment scheme with their creditors. If the debtor does in fact work out a repayment scheme and the creditors refuse to accept it, then that reduces the creditor's claim in bankruptcy. Basically what this is, is an attempt to try to help people work out a voluntary system before they take the plunge into bankruptcy.

And I wish, like Mr. Plunkett, that — I wish the honor system would work with respect to bankruptcy. I wish the honor system would work with respect to people paying their taxes and then we could get rid of the IRS, but what we found here is that the honor system doesn't work when it comes to bankruptcy.

GWEN IFILL:

Does credit counseling help the honor system work?

TRAVIS PLUNKETT:

Credit counseling is a good thing if it's delivered at the right time and if it's delivered in a way that helps people choose an alternative to bankruptcy. The problem is that the main product that's out there that's an alternative to bankruptcy is called a dead management plan. It's a credit card consolidation plan offered by credit counselors.

And what my organization has shown over the years is that creditors have become less generous in offering concessions in the debt management plan to lure people away from bankruptcy.

The other problem is that these are people who are the brink of severe financial difficulty. And there's a serious question about whether credit counseling could help them at that point. Early intervention is key for credit counseling.

GWEN IFILL:

Okay. Travis Plunkett and Todd Zywicki, thank you both very much.