Before I begin my rant on Chapter 13 and the way I see things turning against some debtors ( not all debtors), I would like to start by saying that I honestly believe that Consumer Bankruptcy is Financial Planning for the Future. Also, I still believe in the concepts of a “Fresh Start” and the “Honest but Unfortunate Debtor“. These are concepts that I learned about a long time ago, concepts that I embraced and believed in and concepts that I still embrace and believe in today. However, at times my beliefs are tested. I don’t believe that the bankruptcy system was designed to be oppressive, but it is turning out that way for some individuals. Likewise, I don’t think the Bankruptcy Code was designed to take away a person’s incentives to work hard and create wealth, but it is turning out that way for some individuals. I do believe that the bankruptcy code should be designed to instill in all debtors the opportunity to put the past behind them and move forward as positive and productive members of society.
Back in 2005, Congress sent President Bush an alleged Consumer Protection Bill (BAPCPA), and he signed it. Since that time, Debtor’s in Chapter 13 have had to deal with new rules on how they file their case, how they can spend their money and most importantly, how they plan for the future. Remember back in 2005, the real estate market was going like gang-busters and individuals were investing in real estate as part of their retirement planning. Unfortunately, we are now seeing how a great real estate deal at the time is causing many individuals into bankruptcy. Of course, I am talking about a small minority of individuals using Chapter 13 to re-organize. More importantly, these honest debtors have witnessed their “Great Deal” turn sour into the “Worst Deal” of their lives and also watched their IRAs and 401Ks take a hit are now finding themselves “trapped” into a system where they will spend the next three to five years of their lives paying back a creditor or creditors.
Of course, there are two sides to this story.
THE GOOD SIDE
Yes, bankruptcy offers a solution to pressing legal problems that many debtors are facing. Yes bankruptcy still offers individuals a chance to re-group and pay their creditors as they can afford to. Without bankruptcy, many idividuals would be at the mercy of their creditors for years and years. Many individuals paychecks and bank accounts would be garnished. In Florida, there are quite a few ways that creditors can collect on their judgments.
But, at the same time there is still that little voice in the back of my head saying my clients are being forced to pay back their debts over the next five years, but what happened to the bank presidents, wall street executives and mortgage companies that were a little careless? No-one has gone to jail in this whole recession – banking debacle. Some of the banks were bailed out. Many of the banks who were lending recklessly are now out of business. Yet, no-one has gone to jail, and no-one is being forced to pay back any monies for their reckless behavior. That is outrageous in my opinion.
THE BAD SIDE
Chapter 13 has been turned into a system where each and every penny that the debtors earn will be scrutinized, and if the debtors have any additional disposable monthly income during the life of the plan, it must go to the creditors. Chapter 13 does not reward hard work or encourage anyone to attempt to earn more money. Why would you work overtime knowing that you will have to give it to your creditors.
Yes, that is what I said. Rather than give these honest but unfortunate individuals an opportunity to rebuild their nest eggs that were decimated during the “Recession”, we are compelling them to indentured servitude for 3 to 5 years. I would consider that punishment in some circumstances. If you are an above-median income debtor on the day you file for protection, you are compelled to file a 5 year plan of repayment (Now known as a 5 year sentence). The only way you can get out early is to pay 100% to your unsecured creditors. This does not sound like consumer protection to me at all. This sounds like punishment that is being inflicted upon individuals by their creditors under an alleged Consumer Protection Statute.
When I asked our local U.S. Trustee where the incentive is for chapter 13 debtors to work harder or work overtime, he could not think of one advantage. Just imagine that you have a pretty secure job and you are a good, loyal and trustworthy employee. Your boss comes to you and says Hey, I want to give you a promotion, you will make more money, etc. How many people are going to want to take it? Would you be willing to spend more time away from your family to earn more money for your creditors? I wouldn’t.
So the question is: Did the 2005 BAPCPA amendments to the Bankruptcy Code really prevent abuse and protect consumers? Or, in the alternative, did it create a Debtor’s Prison for some Honest But Unfortunate individuals? Or, maybe a little bit of both.
One burning question in my mind is this: If Walt Disney had filed for bankruptcy protection under BAPCPA, would we have Disneyland and Disneyworld? I don’t think so, and that scares me because I don’t want to even consider that possibility.
I can go on and on, but I really needed to get this off my chest.