Has the Purpose of Bankruptcy Been Changed by the Supreme Court and Congress?

01 May Has the Purpose of Bankruptcy Been Changed by the Supreme Court and Congress?

What is the purpose of bankruptcy? Is it to take a debtor’s assets or future income and pay at least something backto creditors? Is it to give a debtor the opportunity for a “fresh start”? The US Supreme Court has recently decided that the purpose of the 2005 amendments to the Bankruptcy law was to ensure that debtors repay creditors the maximum they can afford.

Historically, society usedto want to force a debtor to pay back his/her creditors. A person who could not pay thier debts would be put into debtor’s prison, not to punish them, but to hold them for ransom in hopes that their family would come up with the money to pay their creditors back. Later, bankruptcy’s purpose was to gather a debtor’s assets and liquidate them so that creditors could be paid back on an equal basis.

In the last few decades, the focus of bankruptcy has been on the “fresh start”. Society felt that giving a fresh start to aperson who was deep in debt would be good not only to the debtor, but would be a benefit to us all. Court decisions throughout the country held the ability to get a fresh start as the most fundamental purpose of bankruptcy.

In 2005, however, Congress passed a law that may have shifted the emphasis away from the “discharge” that bankruptcy gives to a debtor and back towards a system that maximizes the return to creditors. Called the Bankruptcy Abuse Prevention and Consumer Protection Act(BAPCPA), the law established a “means test“, which sets the rules on how much a debtor must pay back to his/her creditors, but only applies to people whose income over the past six months is above the median income for people in their state with the same household size. Frequent postings on Bankruptcy Law Network have explained whythe means test is not a fair way to determine how much people should pay back to their creditors.

One of the key expenses people are allowed to deduct on the means test is theautomobile ownership deduction. This deduction, if allowed, often means the difference between being able to file a Chapter 7 or a Chapter 13 case. In a Chapter 13 case, taking the ownership deduction can make a difference of almost $30,000 in the amount that must be repaid to unsecured creditors.

Earlier this year the US Supreme Court decided the Ransom v. FIA Card Services, N.A.case which limits a debtors ability to deduct the automobile ownership expense to people that actually have an actual payment due on the vehicle to a secured creditor. In making their decision, the Court has moved away from the concept that bankruptcy’s major purpose is to give people a fresh start, and back towards the idea that people who file bankruptcy should repay their creditors as much as possible.

The Ransom decision discriminates against people who enter bankruptcy without a vehicle loan. It seems to suggest that it is better to borrow money against a vehicle before filing for bankruptcy. Be sure to thoroughly discuss this issue with your experienced bankruptcy attorney.

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Peter Orville is a bankruptcy lawyer in Binghamton, located in the Southern Tier of New York. He is a member and New York co-chair of the National Association of Consumer Bankruptcy Attorneys.
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