I wrote last month about the first round of studies that had come out about the impact of the new bankruptcy laws and the not so surprising news that most of the people filing for bankruptcy were, shockingly, bankrupt and unable to comply with any type of repayment plan. Today comes news of a new study that reinforces that conclusion and makes one wonder why Congress needed to reform a system that wasn’t nearly as broken as MBNA and its allies would have had us believe.
In what will undoubtedly be the first of many “I told you so” reports, the National Association of Consumer Bankruptcy Attorneys has found that, overwhelmingly, people who file for bankruptcy protection aren’t deadbeats who went on shopping sprees with the intention of shirking their debts.
And what this study found should not be surprising to anyone who has practiced bankruptcy law:
[I]n the first analysis of the tens of thousands of people who have undergone credit counseling since the law passed, the bankruptcy attorneys association found that nearly all (97 percent) of the debtors truly couldn’t pay their debt
(…)
Four out of five filers felt forced to seek bankruptcy protection because of a job loss, catastrophic medical expenses or the death of a spouse
(…)
One in 30 consumers (3.3 percent) was a candidate for paying off what he or she owed under a debt management plan (DMP), the report indicated.
In other words, the entire bankruptcy system was changed to capture one infintessimly small portion of the people who were filing for bankruptcy liquidation but might be capable of following through with a repayment plan. Hardly the abusive situation that was represented during the debate over the reform legislation.
And, even if you are forced into a repayment plan, what are the odds that you’ll be able to follow through with it ?
The highest estimate of consumers being able to make repayments under a credit-counseling DMP was 5 percent, with the low being in the 1 to 2 percent range, according to the report.
Again, this shouldn’t be surprising. Before the reform legislation passed, the failure rates of Chapter 13 plans was extraordinarily high, and most failed or had to be amended before they were finished. This isn’t surprising either; the idea that anyone, least of all someone living on the edge financially, would be able to adhere to a repayment plan that lasted 3-5 years and didn’t allow for much flexibility to deal with emergencies that would undoubtably arise, seems fundamentally absurd from the start.
In short, it looks like the banking industry sold Congress a pig in a poke with this law. The only good thing is that, given the statistics cited above, its unlikely that they are actually going to benefit from the laws as much as they thought they would.
Technortati Tags: Bankruptcy
