New Bankruputcy Law Not Stopping Bankruptcies
By: Howard Giske | Posted: 07th August 2006
After much drama, with huge amounts of last minute bankruptcies, we are now under the new bankruptcy law that went into effect, October 2005. The theory of the new law is that there were too many frivolous bankruptcies, which were reaching the level of 2 million bankruptcies a year. Rather than allowing people to file for bankruptcy under Chapter 7, which let them write off most of their unsecured debt, the intent of this legislation was to force more people to adopt a debt payment plan, Chapter 13 bankruptcy.
The law forces people whose income is above the median income in their state, to file Chapter 13 bankruptcy, instead of Chapter 7. In addition, people must earn a salary, and have $100 left over at the end of the month after reasonable expenses.
In addition, there are the so-called "bankruptcy school" provisions, that people must take courses after filing for bankruptcy, and get up to six months of bankruptcy counseling before filing.
However, now there is seen a jump toward the old rates of bankruptcy. With energy prices hitting the roof and exotic mortgages from three to five years ago going into their high monthly payment phase, bankruptcies are up. If the median income for a family of four in your state is $70,000, usually with two wage earners, your energy, mortgage payments and childcare expenses can easily make you top that amount. The adjustable rate mortgages can have payments increasing $500 a month and more for an average house in a metropolitan area. That means back to Chapter 7 bankruptcy. The whole assumption that people were filing frivolous bankruptcy suits in order to get rid of credit card debt is shown to be largely false. If these cases were mostly frivolous, then the logic was that bankruptcy and especially Chapter 7 cases would decline. That appears to not be the case.
An interesting study from the California Law Review, Vol. 93 No.3 showed that actually about 20% of bankruptcies involve small businesses, not the 2% officially reported in Dun and Bradstreet and Small Business Administration statistics. Many people who file for bankruptcy listed as consumers are actually running small businesses from their homes, including construction businesses, and real estate businesses. These entrepreneurs are being pushed into Chapter 13 repayment plans under the new law, rather than being given a chance at a fresh start. Reasons for bankruptcy can increase as well, from rising costs for building materials, to when a huge mega-store opens up in town.
With this continuing pressure to defend debts to big business such as credit card companies, and mortgage backed securities of banks, at the expense of small business, new problems are created. If new startups of businesses are being discouraged, maybe it's time to go back to a 1930s type of Reconstruction Finance Corporation approach of funneling credit to infrastructure projects, and to small businesses and contractors. That may not be a likely prospect immediately, but it will have to happen. The Bankruptcy Abuse Protection and Consumer Protection Act, the BAPCPA is definitely a blame the little guy, not the big guy law.
The new law also places more restrictions on the filing of business reorganization plans, a so-called Chapter 11. Reorganization plans are sped up to only 120 days, and strictly limited to 18 months. See for legal information for small businesses.
Howard Giske is a legal consultant to Inc. Paradise. For Incorporation services .
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Tags: small businesses, assumption, chapter 13 bankruptcy, chapter 7 bankruptcy, credit card debt, mortgage payments, metropolitan area, unsecured debt, bankruptcies, california law, adjustable rate mortgages, filing for bankruptcy, new bankruptcy law, wage earners, energy prices, debt payment, median income