Study: Law creates many too broke to file for bankruptcy

Category: Bankruptcy Law
Published: Wednesday, 25 February 2015
Written by Admin

Since insolvents are unable to repay debt, they are subject to collection actions and financial judgments and have difficulties obtaining unsecured credit, she said. This is particularly bad for low income individuals, as they have little savings and sometimes rely on debt to face unforeseen expenses and the like.

The study, which was published in January and summarized this week in a Federal Reserve blog post , reached a variety of conclusions about the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. Few of the economists findings were encouraging for consumers.

  • The bottom lines of credit card companies, banks and other financial institutions have been nourished by the act, which was proposed by Wall Street interests, passed by Congress, and signed by President George W. Bush on April 20, 2005. It went into effect Oct. 17, 2005. We cite research ... suggesting that profitability has risen for credit card companies as a result of BAPCPA, Albanesi said.
  • But consumers have suffered. Low income Americans, those most in the need of help, have been the most deeply damaged by changes that made it more difficult and far more expensive to file for protection under bankruptcy laws. Our analysis suggests that the 2005 bankruptcy reform caused a decline in bankruptcy filings, which were replaced by a sizable rise in insolvency and foreclosure, the studys authors reported. We show that insolvency is a state associated with a high degree of financial distress in comparison to bankruptcy. This consequence of BAPCPA is potentially welfare reducing for households.
  • Though it may not seem to matter if you are bankrupt or insolvent -- after all, youre broke either way -- the differences are profound for consumers, especially those struggling to begin anew.

If you cant file for bankruptcy, youre between a rock and a hard place, said Kevin Weeks, president of the Association of Independent Consumer Credit Counseling Agencies. If you cant get that protection, youre stuck.

Heres why: If you file for bankruptcy, debt collectors must stop contacting you or garnishing your wages and, under a Chapter 7 or fresh start proceeding, many of your debts can be discharged.

So, youre broke, but you can start over again to restore your credit score and apply for credit cards, auto loans, a mortgage and other forms of credit, though the terms wont be ideal -- the bankruptcy may be on your public record for as long as 10 years.

But if you cannot file for bankruptcy, due to the newly elevated cost or newly complicated documentation requirements, youll likely end up insolvent -- unable to pay your bills, unable to find shelter from creditors through the bankruptcy court, unable to start again.

Your credit score plummets, so you cannot qualify for new loans. Your home is not protected, as it would be under bankruptcy protection, so your mortgage may go into foreclosure and you are more likely to lose your house.

In bankruptcy, debts are discharged, Albanesi said, whereas in insolvency, debts remain.

Said Weeks: Quite simply, youre left in the lurch.

And there may be no way out -- because, unlike those who come under bankruptcy protection, your debts are never wiped away, so your credit score is perpetually dinged.

The individuals who go bankrupt experience a sharp boost in their credit score after bankruptcy [discharges many debts], the study reported, whereas the recovery in credit score is much lower for individuals who do not go bankrupt.

The 2005 law was intended to discourage and reduce the number of personal bankruptcy filings by introducing a series of new, often burdensome steps. These included a means test, new anti-fraud measures that made attorneys responsible for the statements of their clients and mandatory credit counseling.

All of that substantially increased costs associated with filing for personal bankruptcy protection.

The study found that out-of-pocket costs for filing for Chapter 7 bankruptcy, the most common form of protection, soared from $600 before the 2005 law was passed to $2,500 just two years after it was passed. The average cost for a more complicated Chapter 13 personal bankruptcy rose from $1,600 to $3,500. In either case, these costs put the process out of reach for many consumers.

The reform caused a large and permanent reduction in bankruptcy filings, the studys authors said.

According to data from the US Bankruptcy Courts, nonbusiness bankruptcies plummeted from 1.56 million in 2004, the last full year before the new law was signed, to 597,965 in 2006, the first full year after the new law took effect.

Representatives of the banking industry and other financial entities say this shows that the bankruptcy law worked -- and is continuing to work as it should.

Bankruptcy protection is alive and well, and remains available for those in need, said Jeff Sigmund, a senior spokesman for the American Bankers Association, which represents the nations $15 trillion banking industry. These changes were designed to eliminate abuses and ensure the bankruptcy system is used fairly.

At the same time, however, the new study found that diminished access to bankruptcy protection placed significant stress on many households and disproportionately affected low income Americans.

We document that insolvency is associated with worse financial outcomes than bankruptcy, the study reported, as individuals in this state accumulate collections, judgments, do not have access to new lines of credit and their credit score bottoms out.

Since bankruptcy filings have declined mostly for low income individuals, our findings suggest that the 2005 reform may have removed an important form of insurance against negative income shocks and increased financial distress for this group, the federal and academic economists said.

The bottom line, according to the report: The law helped the financial institutions that lobbied for it. It did not help consumers -- and it harmed many of them.

BAPCPA reduced credit card company losses and increased their profits, the study concluded. However, there is little evidence that credit conditions for consumers improved.

See related: Court judgments for debt: Your options after the gavel

Puerto Rico to appeal ruling voiding bankruptcy law

Category: Bankruptcy Law
Published: Saturday, 21 February 2015
Written by Admin

SAN JUAN (Reuters) - Puerto Rico on Monday said it would appeal a US ruling that voided the islands restructuring law, saying it left the US commonwealth in legal limbo.

Late on Friday a US federal judge ruled that Puerto Ricos so-called Recovery Act, which made some of its agencies eligible for court-supervised debt restructuring, violated the US constitution by allowing a state government to modify municipal debt.

We believe that it is incorrect in law and has the effect of leaving Puerto Rico without a legal framework to allow our public corporations to comply with their obligations in an orderly manner without affecting the continuity of essential services that the citizenry receive, Puerto Rico Justice Secretary Cesar Miranda said in a statement.

(Reporting by Reuters in San Juan; Writing by Edward Krudy and Megan Davies; Editing by Meredith Mazzilli)

Detroit bankruptcy judge approves $178M in professional fees

Category: Bankruptcy Law
Published: Friday, 20 February 2015
Written by Admin

5 Signs It's Time to File for Bankruptcy

Category: Bankruptcy Law
Published: Friday, 20 February 2015
Written by Admin

Bankruptcy is a scary word it drums up horror stories of business giants tumbling from grace or gossip magazine headlines shaming celebrities for mismanaging their funds. But declaring bankruptcy doesn't mean you are a failure or deserving of ridicule. Bankruptcy is simply when you owe more than you can afford to pay and it's very common  in 2012, over 1.2 million Americans filed for bankruptcy, according to estimates from Epiq Systems.

The two most common types of consumer bankruptcy are Chapter 7 and Chapter 13. Chapter 7 bankruptcy liquidates all your non-exempt assets to pay off creditors. It can be a good choice if you have large amounts of unsecured debt, like credit card debt. Chapter 13 bankruptcy reorganizes your debts and puts you on a payment plan, and can be a good option if you want to hold onto certain non-exempt assets or avoid foreclosure on your home.

In many ways, filing for bankruptcy can be viewed as a business decision and in the business of life, sometimes you get into tough financial situations. Declaring bankruptcy can eliminate certain debts, free up funds and help you get a fresh start, but that doesn't mean you should run off and file when you get in a financial bind the consequences of declaring bankruptcy can be felt for years. It's a serious decision that shouldn't be taken lightly.

So how do you know when it's time to file? Here are five circumstances when declaring bankruptcy makes sense.

Read everything you need to know about bankruptcy heregt;gt;

1. You Are a Senior Citizen With No Income and a Lot of Debt

More and more senior citizens are filing for bankruptcy due to decreasing pensions and the rising cost of health care. A 2010 report by John Pottow, a Michigan Law School Professor, found that seniors are the fastest-growing group of bankruptcy filers. Filing for bankruptcy can make sense for many seniors, especially since they usually live on a fixed income and dont work.

Still, senior citizens must pass a bankruptcy test to qualify, which compares your average monthly income against the state median. If your income is too high, due to your pension or other income, you could be ineligible. Luckily, any Social Security benefits you receive don't count as income and almost all tax exempt accounts, like 401(k)s, 403(b)s, profit-sharing, money purchase and defined-benefit plans, are exempt in bankruptcy.

IRAs and Roth IRAs are also protected up to $1,245,475 (this number is adjusted every three years it was last set in 2013). To be on the safe side, seniors looking to file bankruptcy should keep their Social Security money in a separate account and let creditors know in writing that the funds in that account are all from Social Security.

Since many senior citizens count on their home equity to fund their retirement, they need to make sure thats also protected under bankruptcy law. Many states, as well as federal bankruptcy exemptions, offer people filing bankruptcy a homestead exemption to protect a portion of their home equity, and some states even have higher exemptions just for senior citizens. Check your state's homestead exemption laws before considering filing for bankruptcy.

2. You Can't Pay Your Medical Bills

According to a study by NerdWallet Health, unpaid medical bills are expected to surpass credit card and mortgage debt as the leading cause of bankruptcy filings. Medical debt doesnt only affect the uninsured one expert estimated 78 percent of people that file for bankruptcy due to medical bills had health insurance. according to Fox Business.

Co-pays, special treatments, co-insurance and time off work contribute to the costs of medical care and can easily push someone with health insurance into debt. For the uninsured, a minor medical procedure or simply paying for prescriptions out of pocket can rack up huge amounts of medical debt, too.

Filing for bankruptcy can eliminate all your medical bills, but only old debts will be discharged. If you incur more medical debt after filing, you will still owe on the new debt. Make sure all your medical bills and debts are accounted for before filing and if you know youre going to rack up more medical bills, consider waiting to file so you can include all your debts.

Read: How I Went From Businessman to Bankrupt and Back Again

3. You Are Drowning in Credit Card Debt

If you can only make minimum payments on your credit cards and are using credit to pay for basic necessities, it might be time to declare bankruptcy. Before making the decision, take inventory of all your assets: bank accounts, retirement funds, investments, real estate, cars and anything else of significant value. Then add up all your debts. If your debts are more than the value of your assets, declaring bankruptcy might be the right choice.

Before you file, a word of warning: Don't run out and spend with wild abandon before you declare bankruptcy. Charging up your credit cards right before filing can be ruled as fraud by the courts and that debt won't be discharged.

4. Your Ex Just Declared Bankruptcy -- and You Cant Pay the Debt

Getting divorced can be financially devastating you can be left with massive legal fees, unpaid bills and a lot of debt. If you leave your marriage with debt that is only in your name, filing for bankruptcy can offer some much-needed relief, but things arent always so cut and dry: If the debt is in both your and your ex-spouse's name, you might both need to declare bankruptcy.

If you have debt in both your names and your ex-spouse declares bankruptcy, creditors can still collect from you. Even if the divorce settlement states your ex is responsible for the debt and he declares bankruptcy, the debt cannot be discharged and the creditor can still come after you for payment. It's important to understand that the divorce settlement doesn't remove anyone's personal responsibility to pay; it only forces the other spouse to pay the debt.

Filing joint bankruptcy will eliminate everyone's responsibility to pay, which is why it sometimes makes sense for both spouses to declare bankruptcy and discharge all joint debts.

Read: How to Perfectly Plan Your Divorce to Protect Your Assets

5. You Are Unemployed and Deep in Debt

If you have been unemployed for an extended period of time and have no financial resources to fall back on, declaring bankruptcy can help keep you afloat until you find a new job. This decision should be weighed carefully, though; some employers conduct credit screenings as part of a background check and bankruptcy is so damaging to your credit, it could hurt your chances of landing a job. 

Still, being unemployed can make the process easier, because your income is probably close to or below the median income requirement in your state for Chapter 7 bankruptcy. If you don't qualify for Chapter 7, you can look into filing Chapter 13 bankruptcy, but since you are unemployed, it's possible you can't afford the repayment plan and the court will dismiss your case.

Photo credit: Michael Coghlan