bankruptcy law changes have gotten a rude awakening.
500,000 bankruptcy cases were filed, compared to 30-35,000 in a normal two-week period.
Through early December 2005, over 2 million cases were filed, a 49% increase over the
previous year. In my home state of Oregon,
10,183 cases were filed from October 1 through 16, compared with 1,033 in the same time
frame in 2004.
There was a drastic drop in bankruptcy filings at the end of 2005 and in early 2006, but
the demand for bankruptcy has rebounded.
And very few of the people who've received credit counseling after the new bankruptcy law went into
effect were recommended for a Chapter 13 bankruptcy instead of Chapter 7. At the Northwest
Bankruptcy Institute (which I attended several weeks ago), it was estimated that 97 percent
of the people who were interested in filing Chapter 7 could still do so under the new law.
What's worse, a constant complaint from bankruptcy trustees and judges is that they were never
consulted by Congresspeople and the lobbyists who wrote the law. Judges have an interesting
way of dealing with laws that seem to counter efficient judicial administration - they interpret
the law strictly and according to the Czech principle of vejking - carrying out a law or
order to its letter to stymie its intent.
One case involved a cram-down of a car loan. The new bankruptcy law prohibits a Chapter 13 debtor
from reducing the amount of principal one owes on a car in a Chapter 13 bankruptcy plan if the car
was bought less than 2 1/2 years before the filing. The
law is silent about reducing the interest rate, and judges have used that flaw to approve
plans that leave the principal the same, but reduce the interest rate. (Oregon has its own
Chapter 13 form, and it was hinted that you could still cram the loan down if the creditor
The banks that promoted this law haven't reaped benefits from it. Perhaps they should
be going after the root causes of bankruptcy - job loss and high medical bills. (I don't think
the banks can do much about divorce, however.)
Banks and other creditors should have their
economic advisors rail against downsizing, as it causes instability, as workers who don't
feel secure will reduce spending, and workers who continue to spend are likely to file
for bankruptcy if they lose their jobs.
Similarly, banks and medical providers should stump for single-payer health care. Even if
people have health insurance, one major illness or even a difficult pregnancy can force
people into bankruptcy, wiping out the creditors' claims. (I have had many people come
into my bankruptcy practice with 80/20 health insurance, where the uncovered 20% has forced
them into bankruptcy, let alone someone without insurance.)