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Morally Bankrupt
October 17, 2006
Incomes are stagnant, health care and education costs are skyrocketing and the middle class is struggling to make ends meet. One year ago today, after an "eight-year campaign by banks, retailers and credit card companies," Congress made a bad situation worse. That's when a law it passed — making it more difficult for people who get laid off or face catastrophic illness to file for bankruptcy — went into effect. Over the last year, "personal-bankruptcy cases have plummeted" but only because "hundreds of thousands rushed to file before the stricter law took effect." (In 2005, "a record 1.78 million filed bankruptcy." See this chart.) Nevertheless, "it's just a matter of time before the number of people filing bankruptcy gets back to a normal level." Those who do file bankruptcy will find it significantly more costly and confusing under the new law. Lawrence Brooke, an attorney in Alexandria, sums up the legislation's impact: "It's designed to make life miserable for anybody who owes money. It's a help-the-banks, squish-the-little-guy law."
- The law makes it difficult and costly for people who are broke to get back on their feet. The law has "increased basic filing costs by about $200." In Northern Virginia, costs "have jumped from $750 or $1,000 to $1,500 or more." Also, "Attorney fees for typical bankruptcy liquidation ran between $1,000 and $1,500 a year ago. Today, those fees are generally running between $2,000 and $3,000." (As a result, "pushing many debtors to file for bankruptcy without legal representation," placing them at a further disadvantage.) Debtors are also "required to take credit counseling courses, which they must pay for" and costs about $300.
- Debt collectors are using the bankruptcy bill to spread fear and misinformation. One reason that bankruptcy filings are down is that so many people filed just before the new law took effect. Another reason: creditors are lying to customers. U.S. Bankruptcy Judge Michael Williamson says, "people apparently are being told by debt collectors that bankruptcy is no longer available." Harvard Law Professor Elizabeth Warren explains, "If debt collectors have grown bold, then Congress has helped them along. By passing a bankruptcy bill that is deliberately and publicly anti-debtor, these debt collectors have a ready audience when they bully and frighten people into believing that they have all the power." American Progress has a plan to "respond to debt collectors' new abusive tactics."
- The bankruptcy bill only added to the burdens of the middle class. One thing the new law hasn't done: actually help people get out of debt. According to a report by American Progress and SEIU, "middle class families are struggling to pay for a home, health insurance, transportation and their children's college education due to a weak labor market and sharply higher prices." As a result, "middle class families are borrowing record amounts of money." Fewer middle class Americans are prepared to deal with a lay off or a medical emergency. The new bankruptcy law makes it harder for middle class Americans who go through hardship to get back on their feet.
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