Bankruptcy reform costly but pointless
By Cathy Moran, California bankruptcy lawyer on Jul 31, 2008 in Means Testing
The government’s accountability office reports a 50% increase in the cost of bankruptcy. A large part of the increased expense can be traced to the means test, that supposedly objective measure of whether an individual has the ability to repay his creditors some of the debt he owes.
On this site, Kurt O’Keefe looked at the hollow promise that reducing bankruptcies would reduce the cost of credit for those who avoided bankruptcy. We were told by the banking lobby that consumers who sought bankruptcy relief increased the cost of credit to each American family by $400. We’re two and a half years into “reform” and there is no sign of the cost of credit falling.
A bit of critical thinking would have told you that it is not bankruptcy that causes losses to lenders, it’s insolvent borrowers. A certain number of borrowers can’t repay their borrowings under any circumstances, whether or not that borrower gets the legal relief afforded by bankruptcy.
The means test, found in variations of Official Form B22, is a sink hole for attorney time. It requires six months of income information from all sources. Then, one needs to quantify the debtor’s medical expenses going forward, less any amounts contributed to health savings accounts; assess and gather support for the cost of sending a child to school; parse out the deductible portion of the phone bill (caller ID, call waiting, pagers, and ISP) from the non deductible cell phone and land line (Since when is call waiting a necessity? Sounds like a telecommunication lobbyists at work to me.), etc.
Then you need to find the number of remaining payments on the car, the pay off balance (not the total of remaining payments), the date of the car purchase, etc. The more the debtor owes on the car, the less he has to pay to other creditors. It goes on and on.
Because the result at the bottom line of the form determines whether the debtor is presumed eligible to file Chapter 7 or determines how much unsecured creditors will get in Chapter 13, the exercise is terribly important, but not meaningful or sound: the means test favors the creditors of those who live modestly and pay their taxes over those who have bought cars and property on terms or failed to pay taxes or support.
Truth be told, there simply isn’t a great untapped ability to repay the credit that was extended so recklessly over the past decade.
The means test may have allowed me to raise the fees I charge to clients, but there is little satisfaction in earning that fee with the pointless paper pushing foisted on us by bankruptcy “reform”.
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