Blog sponsored by Bankrupt-Law.com


By David Nicklaus
ST. LOUIS POST-DISPATCH
07/02/2006

David Nicklaus

The image of the deadbeat borrower, defaulting on a debt out of sheer
laziness, is a powerful one in the American psyche. Certainly the nation's
bankers used that stereotype to great effect when they persuaded Congress to
overhaul the nation's bankruptcy laws last year.

The trouble is, eight months after the law took effect, the stereotype
doesn't appear to be true.

The new law forces people to undergo credit counseling before filing for
bankruptcy, and it forces many bankruptcy filers to put together a Chapter
13 repayment plan instead of merely writing off their debts. The theory is
that, if you push people a little, they'll work harder to repay what they
owe rather than taking the easy way out.

So far, the evidence doesn't seem to support that theory. Charles Tabb, a
law professor at the University of Illinois, says credit-counseling agencies
are finding that fewer than 4 percent of prospective bankruptcy filers can
afford to repay their debts. "The vast, vast majority of people are in
desperate need when they consider bankruptcy," he says.

Research has shown, in fact, that most bankruptcies are caused by disruptive
events like a layoff, divorce or serious illness. But that's not what the
credit-card issuers told Congress. They said between 15 percent and 30
percent of all bankruptcy filers were dodging debts that they should be able
to repay, and they estimated that lenders would recover an extra $3 billion
a year from deadbeat borrowers.

Now, some estimates put the figure as low as $450 million, and much of that
will be eaten up by higher legal costs. "There's a lot of sound and fury,
hassle, time and money being expended with no benefit," Tabb says.

For someone in financial trouble, the higher costs and procedural traps
imposed by the new law can be a significant barrier. Say your house is being
foreclosed upon the day after tomorrow, and you've exhausted all efforts to
come up with the money. If you traipse down to bankruptcy court, a judge
will ask whether you've completed credit counseling. If the answer is no,
you may lose your house while you're still trying to enroll in a class.

Even if you jump through all the hoops, you may not be able to afford to
legally go broke. T.J. Mullin, one of St. Louis' most prolific bankruptcy
attorneys, says the cost of filing a case has at least doubled. He estimates
that a Chapter 13 case, now required for anyone who earns more than their
state's median income, will take up to eight hours of legal work. At $250 an
hour, that's $2,000.

"The people who were at the lowest and most desperate end of society
previously used bankruptcy as a very cost-effective way to get a fresh
start," Mullin says. "Those people aren't going to be able to file unless
they can get together more dough to file."

Just because the borrower stays out of bankruptcy court, that doesn't mean
the lender will be able to collect. "He can file bankruptcy and not pay you,
but he can also just not pay you," Mullin says. If the money's not there,
it's not there.

And in the aggregate, it's clearly not there. "The amount of money being
left on the table by the quick and easy discharge (under the old law) was a
very small sum," Tabb says.

Unfortunately, we're punishing some of the most desperate members of society
in order to collect that small sum.