April 4, 2005
COMMENTARY: Winds of change | An overview of the bankruptcy reform legislation currently under consideration in Congress
By Leslie E. Linfield
Executive director, Institute for Financial Literacy, Portland
After eight years of debate and compromise, Congress is poised to pass legislation that would reform the nation's bankruptcy system. The Senate approved the overhaul last month, and the House of Representatives is scheduled to take it up any day now.
The last time Congress passed legislation reforming bankruptcy was over a quarter of a century ago. Proponents of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 believe that this legislation is long overdue. Opponents say that the bill falls short. Whatever side you land on, passage seems imminent. So the question becomes, how would this new law impact Maine's businesses and consumers?
Let's start with a brief overview of the bankruptcy system. The founding fathers, coming from a place that had debtors' prisons, believed enough in the concept of a fresh start through bankruptcy to include a provision for it in the Constitution. In Article I Section 8, Congress is given the power "to establishˆ uniform laws on the subject of bankruptcies throughout the United States."
Under current law, there are several chapters in bankruptcy, all with different purposes. Chapter 7 takes a consumer's assets and uses them to pay off debts. Any remaining debts are then discharged. Chapter 13 requires the consumer to pay back a portion of the debt through a court-ordered repayment plan. The benefit is that the consumer can retain some assets, such as a home. Chapter 11 is designed to allow businesses to reorganize in an attempt to keep their doors open. Chapter 12 is similar to Chapter 11, but is designed specifically for family farmers; it has been a temporary provision in the bankruptcy code for many years.
What does bankruptcy look like in Maine? In 2003, 4,660 petitions were filed in the bankruptcy court. In 2004, that number dropped slightly to 4,508. In both years, 97% of the petitions filed were consumer filings, while the remaining three percent were businesses. All told, that is approximately one personal bankruptcy filing for every 166 households, which is better than the national average of one for every 73 households. Of consumer bankruptcies, the large majority were Chapter 7, with 4,163 in 2003 and 3,954 in 2004.
The bill under consideration in Congress will tighten access to Chapter 7 filings by imposing a means test on individuals who earn more than the median income for their state; in Maine, the median income as reported in the 2000 census was $37,240. This means test will examine the debtor's income and expenses based on Internal Revenue Service standards. If it is determined that a debtor can repay at least $6,000 over a period of five years, that debtor would have to file under Chapter 13. It is estimated that means testing will affect no more than 10% of consumer filers, as roughly 80% of those who file for personal bankruptcies earn below their state's median income.
A new provision in the bill requires mandatory credit counseling and financial management education for all consumer debtors before they file their bankruptcy petitions. However, critics have raised concerns about forcing debtors to seek out services from a sector that in recent years has come under great scrutiny for questionable practices. Think of the AmeriDebt case, in which more than 60,000 consumers found that the credit counseling agency they sought help from was being sued by numerous attorneys general and ended up in bankruptcy court last June.
Peter Fessenden, the Chapter 13 trustee here in Maine since 1981, has been a proponent of financial education for years, and has offered a voluntary educational program for all Chapter 13 debtors since 1989. Fessenden could see a large increase in attendance at his classes, since he expects to see an increase of Chapter 13 filings in general due to the tightening of access to Chapter 7. About 10% of total consumer filings in Maine have been Chapter 13 petitions. The national average is approximately 30%.
Proponents of reform believe that mandatory financial education creates an opportunity for people to become more financially literate ˆ and there's no doubt that a more financially literate population is in the best interest of Maine. Individuals would profit from having a better handle on their finances; in addition, some research has shown that financial education can have a positive effect on recipients' quality of life, health and well-being. Businesses would benefit by having customers who are less of a financial risk and who may have improved buying power.
Finally, another provision of the reform legislation that would affect Maine is the proposed permanent enactment of Chapter 12. Sen. Susan Collins has championed this cause, and sponsored the amendment that extended Chapter 12 protections to fisherman as well as farmers. This provision will allow an industry that has been in transition to afford those who find themselves in financial difficulty the ability to reorganize their businesses rather than having to completely liquidate them.
Should the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 pass in the House, bankruptcy as we have known it will change. Whether those changes are positive or not remains to be seen.
After eight years of debate and compromise, Congress is poised to pass legislation that would reform the nation's bankruptcy system. The Senate approved the overhaul last month, and the House of Representatives is scheduled to take it up any day now.
The last time Congress passed legislation reforming bankruptcy was over a quarter of a century ago. Proponents of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 believe that this legislation is long overdue. Opponents say that the bill falls short. Whatever side you land on, passage seems imminent. So the question becomes, how would this new law impact Maine's businesses and consumers?
Let's start with a brief overview of the bankruptcy system. The founding fathers, coming from a place that had debtors' prisons, believed enough in the concept of a fresh start through bankruptcy to include a provision for it in the Constitution. In Article I Section 8, Congress is given the power "to establishˆ uniform laws on the subject of bankruptcies throughout the United States."
Under current law, there are several chapters in bankruptcy, all with different purposes. Chapter 7 takes a consumer's assets and uses them to pay off debts. Any remaining debts are then discharged. Chapter 13 requires the consumer to pay back a portion of the debt through a court-ordered repayment plan. The benefit is that the consumer can retain some assets, such as a home. Chapter 11 is designed to allow businesses to reorganize in an attempt to keep their doors open. Chapter 12 is similar to Chapter 11, but is designed specifically for family farmers; it has been a temporary provision in the bankruptcy code for many years.
What does bankruptcy look like in Maine? In 2003, 4,660 petitions were filed in the bankruptcy court. In 2004, that number dropped slightly to 4,508. In both years, 97% of the petitions filed were consumer filings, while the remaining three percent were businesses. All told, that is approximately one personal bankruptcy filing for every 166 households, which is better than the national average of one for every 73 households. Of consumer bankruptcies, the large majority were Chapter 7, with 4,163 in 2003 and 3,954 in 2004.
The bill under consideration in Congress will tighten access to Chapter 7 filings by imposing a means test on individuals who earn more than the median income for their state; in Maine, the median income as reported in the 2000 census was $37,240. This means test will examine the debtor's income and expenses based on Internal Revenue Service standards. If it is determined that a debtor can repay at least $6,000 over a period of five years, that debtor would have to file under Chapter 13. It is estimated that means testing will affect no more than 10% of consumer filers, as roughly 80% of those who file for personal bankruptcies earn below their state's median income.
A new provision in the bill requires mandatory credit counseling and financial management education for all consumer debtors before they file their bankruptcy petitions. However, critics have raised concerns about forcing debtors to seek out services from a sector that in recent years has come under great scrutiny for questionable practices. Think of the AmeriDebt case, in which more than 60,000 consumers found that the credit counseling agency they sought help from was being sued by numerous attorneys general and ended up in bankruptcy court last June.
Peter Fessenden, the Chapter 13 trustee here in Maine since 1981, has been a proponent of financial education for years, and has offered a voluntary educational program for all Chapter 13 debtors since 1989. Fessenden could see a large increase in attendance at his classes, since he expects to see an increase of Chapter 13 filings in general due to the tightening of access to Chapter 7. About 10% of total consumer filings in Maine have been Chapter 13 petitions. The national average is approximately 30%.
Proponents of reform believe that mandatory financial education creates an opportunity for people to become more financially literate ˆ and there's no doubt that a more financially literate population is in the best interest of Maine. Individuals would profit from having a better handle on their finances; in addition, some research has shown that financial education can have a positive effect on recipients' quality of life, health and well-being. Businesses would benefit by having customers who are less of a financial risk and who may have improved buying power.
Finally, another provision of the reform legislation that would affect Maine is the proposed permanent enactment of Chapter 12. Sen. Susan Collins has championed this cause, and sponsored the amendment that extended Chapter 12 protections to fisherman as well as farmers. This provision will allow an industry that has been in transition to afford those who find themselves in financial difficulty the ability to reorganize their businesses rather than having to completely liquidate them.
Should the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 pass in the House, bankruptcy as we have known it will change. Whether those changes are positive or not remains to be seen.
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