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March 15, 2005


Paul Zrimsek

To raise again a point I made on the earlier thread: even assuming that asset-protection trusts have been a means of abuse in the past, are they going to be any use once the law is changed to means-test upper-income filers out of Chapter 7? It's hard to see how shielding assets is going to accomplish anything important in a Chapter 13 bankruptcy.


Good point. I suppose the filer could just file and quit their job, but if they keep working, Ch. 13 will focus on income, not assets.


Linguists have been able to reconstruct (presumed elements of) the ancient Proto-Indo-European language by comparing the modern versions of its descendant languages.

Anyone care to pick up the ball from Tom and reconstruct the proto-talking-points-memo that must have been the common ancestor of the bankruptcy editorials that he references above?


'found that half said illness or medical bills drove them to bankruptcy."'

They made no mention of assuming huge mortgages, home equity loans and running up credit card and other personal debts.

Nell Lancaster

There's a response to the Zywicki argument here. It seems more soundly based than the assertion that half of bankruptcies are caused by medical bills.


Yeah, I like that rebuttal. Regardles of phoney arguments being offered by bill opponents, one might still ask - what is the need for this new bill?

The numbers do not exactly show an industry in crisis.


I agree - where is the need for the new bill?

I am concerned about the aggressive pushing of credit, especially by commission earning mortgage brokers. If the money dealers are not going to be restrained, it seems unfair to limit the spendthrift borrower’s access to Ch 7. Imprudence, gullibility, and greed should not be grounds for a sentence of enforced penury.

Robert Schwartz

I have many years of experience in the consumer credit business. I said it before and I will say it again. This is a bad bill. It was bought and paid for and is exclusively for the benefit of the Credit Card Companies. it will not save you a nickle, ever. That this has anything to do with Credit Card interest rates is absurd. The Credit Card Companies won the right to charge the rates they charge in the early 1980s when the prime rate was bumping 22%. Have they lowered their rates now that prime is 4.5% and they are funding their credit card loans with market money at 2 or 3%?

It shines and it stinks like mackerel rotting in the moolight.

The Sophist

Nell, TM and TC -

I too appreciated the Bizzyblog rebuttal, especially from a moral judgment standpoint, but I felt he didn't address some of the most powerful arguments of Prof. Zywicki.

I was on the fence on this one for a while, but Zywicki convinced me of the overall soundness of this particular reform. I mean... what are we worried about with this bill? Surely not the anti-fraud provisions, or the priority of payments provision (alimony and child support moving up to #1 in priority), right?

Seems to me most critics are afraid that some debtors won't be able to take advantage of Chapter 7 and will be forced into a Chapter 13 filing.

But as Zywicki points out, under a Chapter 13 filing you still get a discharge at the end of the court-administered period of 3 - 5 years.

Further, even this forcing of people into Chapter 13 is subject to a means-test which seems pretty fair to me:

The most important and controversial provision of the legislation is the “means-testing” of chapter-7 bankruptcy relief.... To calculate the debtor’s available “disposable income,” [in a Ch 13 filing] a judge uses his own subjective preferences to determine the debtor’s allowed living expenses.

The means-testing provisions of the bill will bring some rationality to this system. Those who make above the state median income (adjusted for family size), and can repay a substantial portion of their debts without significant hardship, would be required to file in chapter 13. At the end of the chapter-13 plan, this high-income filer would still get a discharge, just as other bankruptcy filers do. There is no “endless treadmill of payments,” just a requirement that high-income debtors repay what they can.

In determining whether the debtor can repay a substantial portion of his debts, the legislation makes allowances for a whole range of expenses right off the top. First, it creates a standardized slate of expenses based on the relevant family size and regional cost of living, for such things as clothing, food, transportation, etc., eliminating the subjective judicial navel-gazing of the current system. It then subtracts from your income all of the debtor’s actual payments on secured debts, such as a home mortgage, car loan, or the like. The debtor can subtract any actual expenses for health care for himself or a dependent, as well as payments for health insurance premiums. Finally, there is an allowance for children’s educational expenses. If after subtracting out all of these expenses, the debtor still can repay $10,000 or 25 percent of his debts over a 5-year period, then he would be presumed to have to file in chapter 13.

The debtor could rebut this presumption by showing “special circumstances” that make it too much of a hardship to file in chapter 13, in which case the debtor would still be permitted to liquidate his debts in chapter 7.

Seems pretty generous in terms of determining whether a debtor would have adequate income to be forced into Chapter 13.

Subtracting actual payments for secured debt (the most important debts of any person or family -- mortgage and car, and in some cases, furniture and appliances) is a pretty important concession, as is deducting medical and healthcare costs, as well as educational costs. I'm hard pressed to think of someone who has these things as a victim of avaricious credit card companies driven to file for bankruptcy, when... oh no, instead of Ch 7, he has to file under Ch 13 and repay some of his debts!

I mean, seriously, is anyone who is able to pay $10,000 or 25 cents on the dollar over 5 years after the above allowances someone who is properly described as the poor wretched victim of predatory sub-prime lenders?

But, the means-test affects a small percentage of bankrupt filers in any event:

So how many people would be affected by means-testing? The estimates are that some 7-11 percent of current bankruptcy filers would be affected by the means-testing provisions of the bill. Roughly 80 percent of bankruptcy filers earn below their state median income, and so will get tossed out of the means-test immediately. For that 80 percent — roughly 1.2 million of the 1.5 million bankruptcy filers last year — the means-test will be completely irrelevant. They will be permitted to file chapter-7 bankruptcy just as under the current system. Roughly half of the remaining 20 percent of filers won’t be able to repay enough of their debt to meet the repayment criteria, so they will be dropped out as well and be permitted to file just as today. So in the end, only the highest-income filers with the largest repayment capacity will be affected.

So apparently, those folks who are financially in bad shape, and presumably really can't pay, won't be affected by means testing at all. To get all hot and bothered because of the rich bankrupts'seems a little odd, to say the least.

And then we learn that just in case all this protection wasn't enough, the means-tested Ch. 13 requirement is merely a rebuttable presumption, so if your circumstances dictate it, you can get out of it.

It seems a stretch to describe this as "enforced penury".

As for the need for reform, well, too many people seem to believe that without these reforms, the credit companies will just suck it up and write down the bad loans, then take that out of the CEO's paycheck. A common theme seems to be, "Stick it to the money men!" Sadly, the truth is far closer to Zywicki's point that these costs for bad loans and bankruptcy writedowns are passed on to those of us with good credit. I'd say that presents a need to stop fraud and wealthy bankrupts taking advantage of the system.

One last note -- Bizzy's respond was significantly weakened, I thought, due to his focus on secured lending, such as mortgages and car payments. Those wouldn't be affected much if at all by these reforms, I believe, as they are secured by the underlying home/car/asset.

-The Sophist


Good job, Sophist - have you got a blog?

My (casual) impression is that supporters of this bill are laying in the weeds, figuring it will pass anyway.

But if someone can find a table-pounding supporter, bring 'em on!

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