Bankruptcy is Alive
by Jennifer Emens-Butler
The rumors of the death of bankruptcy are greatly exaggerated.
Many who have been tangentially aware of the latest bankruptcy news have come away with the misconception that bankruptcy relief no longer exists. While it may not be 'well' it is alive and will continue to be a force in our economy. Debt relief of one form or another is as old as time. There is no reason to think that enactment of the bankruptcy reform act at the behest of the credit card industry could eradicate debt relief.
Why is bankruptcy so prevalent? Another misconception is that Americans are overspending on stuff. Most would assume, that Americans are overspending on clothes, appliances, nights out and other extravagances. Credit card use is through the roof, so it must be the stuff, right? Wrong. Renowned Harvard Law Professor Elizabeth Warren has been conducting a thorough analysis of spending in America now as compared to 30 years ago. The results she reported in her 2005 article, The Immoral Debtor? were startling.
In inflation adjusted dollars, Americans are spending less than they were 30 years ago on food, despite the new era of working moms and eating out. Professor Warren attributes this to the lack of superstores and the price of the major diet staple - meat-- 30 years ago. So it must be the fancy designer clothes? Wrong again. Again, Americans are spending less in inflation adjusted dollars now than they were 30 years ago, partly attributable to modern discount superstores. The same applies for appliances while spending on electronics has increased the savings for appliances overall far outweigh that increase. Finally and surprisingly, Americans spend less per car today than they did 30 years ago. Despite today's souped-up SUV's, people simply keep them longer.
So where's the fraud and the purchasing with reckless abandon? It turns out that Americans are spending astronomically more on their homes, insurance, child care and multiple vehicles than they did 30 years ago. Home down payments have decreased while housing prices have skyrocketed. With the advent of the working mom, while per household income has increased, working males are making essentially the same as they did 30 years ago in inflation adjusted dollars, so they are unable to afford these increased expenses. The families also spend more on dependant care, for children and other relatives, since both spouses must work to maintain the household. With savings at 0.6 % now, as compared to 11% 30 years ago, there is simply no room for misfortune such as divorce, injury or job loss.
For all of the new law's downfalls, Chapter 7 is still available and essentially the same, despite the increased cost (nearly double), for those earning less than the state median. In Vermont that is approximately $65,000 for a family of four, well above the median of bankruptcy filers. Those above the median will be forced into a Chapter 13 for a 5 year repayment plan. Unfortunately, under the new Bankruptcy Code, the repayment is not necessarily based upon what the debtors can afford, but what the IRS and Congress say they can afford based upon standardized expense allowances. The complexities of the new Bankruptcy Code require expert advice, but do not make relief unattainable.
Only time will tell us the long term effects of bankruptcy reform. Conventional wisdom theorizes that the reform will have unintended negative effects upon some debtors but also, ironically, upon the credit card industry as well. Bankruptcy filings have indeed slowed, since the courts received nearly 6 months of bankruptcy filings in the two weeks before the new Bankruptcy Code became effective. As long as the economic crisis in this country, caused by outsourcing, job loss and a low living wage, combined with increased costs of living, persists, the bankruptcy system will survive.
The information provided in this article is offered for informational purposes only; it is not offered as and does not constitute legal advice. Every situation is unique you are encouraged to seek legal consultation to address your individual circumstances.