The 2005 Bankruptcy Reform: How Banks Legislated Perpetual Debt

Banking interests are diligently working harder and harder to revise the bankruptcy laws so that it is evermore difficult to file for bankruptcy. The National Consumer Bankruptcy Coalition (NCBC), the banking industry lobby, started pushing its own agenda. Rather than stop lending to people in financial trouble, the banking cartels realized a better, more profitable solution. If they could only restrict the rights of customers and American citizens, they could burden their constituents with debt forever! 

NCBC started pushing for a bankruptcy law reform. NCBC created a bill in September of 1997 and persuaded two congress members to introduce it. Hilary Clinton was one of them. 

"The bill was long and complex, couched in virtually unreadable prose. But to a trained bankruptcy lawyer, the intent was unmistakable: to undercut virtually every protection in the bankruptcy laws. Homeowners who had fallen behind on their mortgages would be prevented from catching up on past-due house payments until they had also paid off their credit card debts, increasing the likelihood of foreclosure. Families would no longer be able to free themselves from certain unsecured debts, so they would be required to make payments (plus penalties, late fees, and interest) on some of those bills for the rest of their natural lives-even if those payments took up 100 percent of their paychecks. 

To win over legislators, credit industry executives lobbied extensively and donated more than $60 million in political contributions. This was followed by a public relations strategy that would make any spin doctor proud. Instead of telling the public that the bankruptcy reform bill would improve profits for credit card companies and giant banks (not exactly the most sympathetic group), the NCBC and its supporters in Congress announced that the bill would help the American family. To quote Democratic Repetitive Rick Boucher: ‘The typical American family pays a hidden tax of $550 each year because of … bankruptcies of mere convenience.’ The implied promise, repeated so often that it has become an article of faith, was that changing the laws would put $550 a year in the pocket of every bill-paying American family." ... 

"According to the NCBC, the same banking lobby group that generated the $550 promise, only 100,000 of the 1.5 million families who file for bankruptcy each year could afford to repay some of their debts. In other words, under the proposed bill, those 100,000 bankrupt families would be expected to generate $550 for every household in American, since the other 1.4 million are already tapped out.

Suppose the laws were changed, and those 100,000 families could no longer seek protection from the bankruptcy courts, and they were forced to repay as much as they possibly could. In order to return an amount that added up to $550 for every household in America, each one of those bankrupt families would have to repay more than $550,000, let alone earned enough money to repay that amount. But even if a magic fairy somehow gave all the bankrupt families every dollar they needed to repay their dects in full, what makes anyone think the banks would pass that money on to consumers? Recall that the credit card industry got a $10 billion windfall from falling interest rates in 2001 that they did not pass on to their customers. Why would this supposed $550 per family be any different?" 1

(Source) 

During Bill Clinton’s presidency, this bill was vetoed. The president could afford to give up future campaign contributions. In 2002, the bill was introduced again and was defeated due to the diligent efforts of women’s interest groups. However, the good news couldn’t last forever. On April 20th 2005, President Bush signed a bankruptcy reform bill into law. After eight years and $40 million in lobbying dollars, the 500-page bill, written mostly by financial interests, was made law. The law imposes a two-tier system that reduces the number allowed to file Chapter 7 bankruptcy and forces them to file under Chapter 13 which requires considerable repayment. (Click Here for more about the 2005 bankruptcy law)

There are two types of bankruptcy, Chapter 7 and Chapter 13. Usually, most would pick Chapter 7 because it would liquidate assets, and the individual could start over. Chapter 13 focuses on repayment. Those who have high incomes are prevented from filing for Chapter 7. How do they determine “higher income”? In whichever state the individual filing for bankruptcy lives, that individual’s current monthly income will be measured against the state's median. If your income is more than the median, a new part of the law was added, you must pass the means test in order to file for a Chapter 7. The purpose of this test is to determine whether one has enough disposable income, “after subtracting certain allowed expenses and required debt payments, to make payments on a chapter 13 plan. To find out whether one can pass the means test, you subtract certain allowed expenses and debt payments from one’s current monthly income. 

(Source)

Before doing any of the aforementioned, one must complete a credit counseling by a permitted agency approved by the U.S. Trustee’s office. This counseling is designed to give one an idea about whether bankruptcy is appropriate or not. Counseling is a required action even if repayment is in no way feasible. If the bankruptcy is approved, individuals are then required to go to another counseling session, this time to learn personal financial management. 

The law undoubtedly adds some complicated requirements. This makes it harder and time-consuming for lawyers dealing with bankruptcy cases. The cost for lawyer representation goes up accordingly. The law also imposes new requirements for the lawyers themselves. The biggest change is that lawyers must be able to personally vouch for and verify their clients’ claims. 

“Under the old rules, people who filed under Chapter 13 had to devote all of their disposable income – what they had left after paying their actual living expenses – to their repayment plan. The new law adds a wrinkle to this equation: Although Chapter 13 filers still have to hand over all of their disposable income, they have to calculate their disposable income using allowed expense amounts dictated by the IRS – not their actual expenses – if their income is higher than the median in their state. And these allowed expense amounts must be subtracted not from the filer’s actual earnings each moth, but from the filer’s average income during the six months before filing.” 2

The new law puts considerable strain on judges, making them unable to waive repayment plans as they used to; because of this, hundreds of judges and law professors voiced their experienced opinions, but they were ignored. The new law also values property in replacement value instead of auction value. 

It is clear what this law did; made it more costly to file for bankruptcy. It is being used as a deterrent for those who are considering bankruptcy. Even if one does file for bankruptcy, they could still be under the boot of banking interests for years. Where is the representation for these ideas? Where are the politicians from Capitol Hill to protect the public? We hear nothing from Washington because, just like the Congress (as explained above) and the courts, they have all been bought and paid for one way or another. 

1. Warren, Elizabeth and Tyagi, Amelia Warren. “’The Cement Life Raft’ (Chapter Six)” PBS Frontline. November 24, 2004.

2. Findlaw for the Public. “The New Bankruptcy Law.” April 7 2007 

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