Bankruptcy bill full of loopholes
By Kathleen Day and Caroline E. Mayer
Washington Post
It took eight years of political maneuvering, but a bill to overhaul the nation's bankruptcy system now looks close to becoming law. If it does, that's when the real fight will begin.
Helayne Seidman • The Washington Post
Lawyers who have combed through the 501-page bill say that despite its attempt at specificity and bright-line tests to distinguish the truly destitute — who would still get to erase most of their debts — from the casual spendthrifts attempting to wriggle out of inconvenient bills, much remains open to argument and interpretation.
Donna Roman and her family resorted to credit cards when illness stopped her paycheck. Roman, meeting with her lawyer, Charles Juntikka, in his Manhattan office, says that she is unfairly made to feel "like I've got a big 'L' on my forehead." That's "L" as in "Loser."
For example, a key test for whether someone can qualify to wipe out almost all debts in bankruptcy would be based on whether the debtor's income is above the median for his state. Each state's median will be based on U.S. Census numbers but would have to be adjusted for inflation — and how to calculate that adjustment has not yet been defined.
The stated goal of the new legislation, which was pushed by the credit card, auto and retail industries, is to end abuse of the bankruptcy system.
But many bankruptcy experts worry it will only add cost and red tape to the process of filing for bankruptcy and not necessarily curb abuse.
Indeed, lawyers are already discussing ways that the legislation's hard-and-fast measures might make it easier than current law to manipulate the bankruptcy system.
Joseph Gold, a bankruptcy trustee for eastern Virginia, predicted that "many creative lawyers" will get around many of the new restrictions.
Under current law, bankruptcy judges have wide discretion to determine who is unfairly filing under Chapter 7, a more pro-debtor bankruptcy option that allows filers to wipe out most of their debt. The new law would have more cut-and-dried formulas that judges would have to use to decide who is eligible for Chapter 7.
A person ineligible for Chapter 7 would file under Chapter 13, which requires some repayment of what is owed to creditors.
Here's the test that judges will now have to apply to people with income above the median in the state in which they live, with examples of how someone could purposely shape the results.
• A debtor's reasonable monthly expenses will be subtracted from estimated monthly income. If the remainder, known as discretionary income, is below $100 a month, the debtor can file for Chapter 7. If discretionary income is over $100, the debtor might not be allowed to file for Chapter 7.
How to game the system under the new law: Buy a new car. Payments are an allowed expense. If they're high enough, they could push discretionary income below $100 a month, making the debtor eligible for Chapter 7.
Because the debtor bought the car within 2 1/2 years of filing for bankruptcy, he will have to pay the full cost of the loan to keep the car, but all other debt will be wiped out.
The result: The debtor has a new car and car payments but no other debt.
• If a consumer's disposable income is between $100 and $166 a month, and his credit card debt is $24,000 or less, the debtor can't file under Chapter 7 and must instead file under Chapter 13.
How to game the system under the new law: Go on a buying spree to push credit card debt beyond $24,000 — and do it 91 days before filing for bankruptcy, another detail specified by the bill. (Doing it within 90 days of filing could mean the debt can't be wiped out.)
The result: Now the debtor's $100 to $166 in monthly disposable income, spread over five years, is less than 25 percent of his unsecured credit card debt. That opens the door to Chapter 7.
• If disposable income is $167 a month or more, a debtor must file under Chapter 13.
How to game the system: Stop working for a month so that average monthly income declines in the six-month period before filing for bankruptcy protection.
The result: Monthly income might drop enough to reduce the amount of discretionary income to less than $100, making the debtor eligible for Chapter 7.
Of course, some lawyers say such abuses can be thwarted.
"People may try that, but there's a general catchall provision in the bill that says if a judge determines that a case has been filed after someone has attempted to game the system, that person's case can still be dismissed from Chapter 7," said John Mc-
Mickle, formerly the bankruptcy lawyer for the Senate Judiciary Committee.
And while people will always try to find ways around the law, he said, it at least will bring some uniformity to the system by spelling out more clearly what is an abuse, he said.
