Experts Clash Over Success of Bankruptcy Reform
By Jay Fleischman, New York Bankruptcy Lawyer on May 1, 2007 in Bankruptcy Practice and Procedure
Legislators heard two starkly different assessments of the nation’s bankruptcy laws on April 30, 2007, with critics saying consumers have been hit with higher costs and supporters pointing to a decline in filings since a major bankruptcy overhaul was enacted in 2005.
At a U.S. House Subcommittee on Commercial and Administrative Law hearing, Steve Bartlett, president and chief executive of Financial Services Roundtable in Washington, said the new bankruptcy reform law is “working quite well” from the perspective of American consumers and the economy. “Bankruptcy filings are down, more Americans than ever are getting credit counseling and, as a result, consumers have the opportunity to become educated about prudent financial management,” he testified. Bartlett said consumer bankruptcy filing rates have fallen to 573,203 in 2006 from an average annualized rate of 1.5 million for the prior five years.
However, Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys, says just the opposite. He claimed that the new law’s biggest impact is the “enormous increase in the costs and burdens” of filing for bankruptcy. “I doubt that it was the intention of even those who voted for the bill to increase documentation requirements, bureaucratic paper work, and other costs so much that honest low-income and working families, not the ‘high rollers’ at whom the amendments were supposedly aimed, are deterred or prevented from obtaining the bankruptcy relief they need. But that is what has happened,” Sommer said.
Sommer added that the filing fee has increased by 50%, new fees for credit counseling and education can total another $100, and that attorneys have had to raise fees at least 50% due to the increase in the documentation required to file.
Sommer suggested that bankruptcy can help solve the foreclosure problems caused by predatory lending and subprime problems, as well as the “bursting” of the real estate bubble. He suggested removing the current limitation on modifying mortgages on a debtor’s principal residence.
U.S. Rep. Linda Sánchez, D-Calif., subcommittee chairwoman, said there’s been extensive comment from the consumer community that “many” of the bankruptcy reforms are “problematic.”
“In particular, the act’s means-testing requirement to determine a debtor’s ability to repay debts and mandate that consumer debtors receive credit counseling prior to filing for bankruptcy relief were two provisions that have proved to be problematic,” she said. She also noted the recent developments in the subprime mortgage industry.
“After being lured into easy mortgage refinancing arrangements with teaser interest rates, more and more American homeowners find they are unable to make their monthly mortgage payments,” she said. “As a result, many attempt to enter into bankruptcy to minimize the risk of losing their homes through foreclosure. However, bankruptcy, which once served as a safety net for the honest, but unfortunate, debtor has now become a minefield of ‘gotchas.’”
Source of post: MarketWatch
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