[how could a family of four getting by to spend only $199/month on food, clothing and others?]--"Bankruptcy overhaul likely to become law"
DEBTORS WOULD PAY MORE, WAIT LONGER FOR FRESH START
By Mark Schwanhausser
Mercury News
Posted on Thu, Mar. 10, 2005
The Senate is expected to approve a sweeping overhaul of bankruptcy laws today that would make it harder and more costly for Americans to seek shelter from overwhelming debts and make a fresh start -- especially in high-priced places like Silicon Valley.
The overhaul would force more people into costlier, longer payment plans, create new bureaucratic hurdles that discourage debtors, and make their attorneys liable for their clients' mistakes. The end result, critics say, is that fewer Americans would be able to afford to go broke.
``Large numbers of people will just give up'' seeking bankruptcy, said Stephen Elias, a Lakeport bankruptcy attorney who is co-author of a self-help book on how to file for bankruptcy for Nolo Press. ``They won't be able to afford it.''
The Senate vote is seen as the last real obstacle to the bill, which has been stalled for eight years. The House is expected to pass the measure quickly, and President Bush has pledged to sign it. The law would take effect six months later.
Banks, credit card issuers and retailers have pushed hard to overhaul the rules to force debtors to pay more of what they owe and to make bankruptcy less attractive. The number of personal bankruptcy filings has nearly doubled over the past decade, before trailing off slightly to 1.6 million cases last year.
Critics say the overhaul is loaded with loopholes for wealthy consumers and would mostly punish those who can least afford help. Those who can't find a legal way to shed their debts would instead take the illegal route, they say, dropping into the underground economy to duck credit card bills, back taxes, medical bills and other debts.
``If people aren't showing up in bankruptcy it doesn't mean there's less debt and distress,'' said Robert M. Lawless, a law professor at the University of Nevada-Las Vegas. ``It doesn't mean people will be better off. This bill does nothing to lower the amount of consumer debt out there.''
Here's a look at some of the key features of the overhaul.
• A strict income test: About two of three debtors in the San Jose area seek Chapter 7 protection, which allows them to pay off as much debt as they can by selling homes, boats and assets, then wiping out whatever is left. But creditors would be blocked from filing for Chapter 7 protection if their household income exceeded California's median and they were deemed able to pay 25 percent of their unsecured debt over five years.
Those blocked would have to appeal to a judge, a process most debtors can't afford, critics say.
That would push more debtors into costlier, court-approved Chapter 13 payment plans. Under Chapter 13, debtors can protect assets such as a home, but they must repay all or some of their debts within five years.
That means debtors face years of payments before they can start anew -- and those who fail to pay on time wind up back where they started.
• A formula for disposable income: Judges currently can use discretion when evaluating a debtor's expenses to determine how much they can afford to repay under Chapter 13. The legislation would impose budgets based on a mix of national and regional cost-of-living standards the Internal Revenue Service uses to calculate payment plans.
For example, the IRS standards assume that a Santa Clara County family of four that earns $50,000 needs to spend no more than $3,436 a month to get by. That includes $2,771 for a mortgage or rent, utilities and insurance; $466 in loans, gas and repairs for cars; and $199 for food, clothing and other expenses.
Expenses that exceed the IRS standards would be considered disposable income that could be applied to a Chapter 13 repayment plan.
``You know that doesn't fly here,'' said Devin Derham-Burk, a Chapter 13 trustee in the San Jose division of the U.S. Bankruptcy Court. ``The IRS numbers will not work here.''
• New hurdles and requirements: Bankruptcy filings would require more documentation, extra legal filings and more time in court. Lawyers would be liable if their clients make mistakes or cheat. And debtors would have to seek credit counseling before they could file for bankruptcy, and complete a money-management course before the court could sign off on their repayment plans.
The system is designed to crack down on debtors who hide income and assets from creditors. But Suzanne Decker, one of four Chapter 7 trustees in the San Jose division, says the court trustees have been scrutinizing debtors' filings the past two years to ensure, for example, that child support was ordered by a judge or that budgets don't include 401(k) deposits that could go to creditors.
``I find very, very little abuse -- maybe one out of 100 cases has what I'd call abuse,'' Decker said. ``It's not as common as creditors and Citibank seem to think.''
Taken together, the new hurdles mean debtors would pay more and wait longer to start fresh.
``This new system operates under the assumption that they're all crooks,'' said Ike Shulman, a San Jose bankruptcy attorney who is legislative chairman for the National Association of Consumer Bankruptcy Attorneys. ``The sad thing is the people who are least likely to do something wrong will have the least ability to afford to jump through the hurdles.''
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