I've already seen a disturbing number of comments about Biden's vote for the Bankruptcy Bill back in 2005.
I also see a disturbing amount of misconceptions being passed around about the awfulness of the bill itself. These comments drive me nuts - especially when I read that "my friend can't declare bankruptcy because of him so I won't vote." I feel compassion for anyone who is in such deep financial trouble - because I've been there myself - but spreading bad information doesn't help.
Because I have been there myself, I want to do what I can to help people in that situation understand their options fully. I especially don't want anyone to be discouraged about filing for bankruptcy because they hear well-meaning but misinformed people tell them how hard it is to get a bankruptcy now.
Back in 2005, I posted a diary to correct some of the misconceptions about the bill: Bankruptcy Bill Awful but No Apocalypse. I've summarized some of the main points after the jump.
Here's the caveat: I'm not a bankruptcy attorney - merely a person who lived through a Chapter 13 bankruptcy and who has spent many hours of volunteer time working for an organization that helps people resolve their problems with debt. You can find a good, consumer-friendly summary of bankruptcy law here: LegalConsumer.com
MYTH: Joe Biden was intimately involved with this bill, as the Senator in a state with a lot of banks, and took care of his friends at the expense of consumers.
FACT: I don't like the bill we came up with, but it was better than the bill that some of the Republicans wanted to pass. The fact is, the bankruptcy laws were being abused by the likes of Enron and its executives, the financial industry was bearing the brunt of the pain, and something was going to be done about that. In 2005's Republican-controlled Congress, a bankruptcy reform bill was going to pass. Without him in our corner, this could have been much, much worse.
MYTH: The bill made it impossible to declare bankruptcy for many people.
FACT: The law itself does not prevent anyone from filing for bankruptcy. It does impose a means test for filing Chapter 7 (which discharges debts immediately) vs. Chapter 13 (which requires a repayment plan - see below). Those who make above the median wage in one's state for a household of the same size may have to file Chapter 13 vs. Chapter 7, but they can still file.
Even if you fail the means test, you may be able Chapter 7. They compare your income to expenses, using a standard schedule for some based on household size, and allow you to document others, such as large medical expenses. A person with big on-going medical expenses, for example, has a much lower barrier than the standard test.
However, even if you fail all the tests - you can still file Chapter 13 - which is still bankruptcy. Although Chapter 13 is not easier than a Chapter 7, it is probably easier than what most debtors are experiencing that drives them to bankruptcy: calls from creditors, threatening collection letters, even court filings, repossessions and foreclosures. The act of filing even a Chapter 13 puts those things on hold immediately.
MYTH: Bankruptcy filing is a lot harder now.
FACT: It does make filing for bankruptcy harder (but not impossible) in two ways:
- The cost of filing for bankruptcy has increased because the attorneys now have a higher burden of proof that they have vetted the debtor's financial information.
- Debtors must now go to a credit counseling service before filing for bankruptcy, which adds a step to the process.
The biggest barrier to filing bankruptcy for a poor person has always been the cost of the bankruptcy itself. Most bankruptcy attorneys (for obvious reasons) require payment in advance. I have advised people to stop paying their creditors anything at all, turn off their phones and if necessary, get a friend to help them go through their mail while they save up the fees to file bankruptcy.
MYTH: The new bankruptcy law turned debtors into indentured servants,
FACT: A Chapter 13 repayment plan is based upon a family's disposible income, after factoring in things like housing, food, clothing, medical expenses, etc. There are standards for such things but they seem to be fairly reasonable, and I have found that the people I've met who are juggling credit cards to avoid bankruptcy usually have not been spending the recommended amounts. Extraordinary expenses, such as large medical expenses, can be included if you document them. You can also spend up to 15% of your income on charitable contributions.
This repayment plan is determined by the courts and imposed on the creditors - they get what they get and the rest is discharged. Chapter 13 includes more kinds of debt in the repayment plans than Chapter 7 includes in the discharge, and protects more of the family's assets. Back in the '90s, that's why I went that route.
A Chapter 13 can be readjusted if the family income declines (in my case, it was not adjusted upwards as my income increased), it can be converted to a Chapter 7 if the family meets the means test at the time of the conversion and it only lasts for a maximum of five years.
At the end of the repayment plan, all outstanding debts (with a few exceptions like student loans) are discharged.
MYTH: A Chapter 13 bankruptcy increases the length of time it takes to restore credit.
FACT: While a Chapter 7 bankruptcy appears on one's credit records for 10 years from the date of filing, a Chapter 13 is removed in 7 years - three years earlier. My personal repayment plan went for five years - two years later, I bought a home with a prime mortgage at a preferred rate.
MYTH: More people are losing their homes as a result of this new bill.
FACT: The sad truth is that a person who has gone from making $70,000 per year to making $25,000 per year, or whose mortgage adjusted from 4.5% to 8.5% without a corresponding increase in income, is not going to be able to afford their home. This was true even under the old laws. Mortgage debt is not forgiven - but the foreclosure process is put on hold for the duration of the case. In fact, this is one reason why people who can do Chapter 7 may choose a Chapter 13. While you are in Chapter 13, the mortgage company cannot foreclose on your home. That may give you the breathing room to get back on your feet.
Edited to change confusing typo.