By Donald A. Hayes, Attorney at Law
For the third consecutive year, a record number of consumers have filed for bankruptcy protection during 1998. According to the Administrative Office of the U.S. Courts, nearly 1.4 million non business bankruptcies were filed in 1998. When compared to only 44,367 business bankruptcies, it works out to 31.5 consumer filings for every business filing. As usual the Central District of California was the busiest bankruptcy court in the country with 116,194 new filing during 1998. The number of new chapter 7 filings alone increased last year and for the first time set a record of more than 1 million new filings.
Bankruptcy filings are up because the stigma is down. Means testing is based upon the belief that a record number of people are filing every year for bankruptcy protection because more and more people who could repay their debts are discharging them instead. The pundits say that this trend is driven by a combination of an increase in the net economic benefits that debtors derive from filing and a decrease in the personal shame and stigma that once was associated with filing.
Indeed it is probable that continuing shame and stigma restrained bankruptcy filings for many years despite the purely economic benefits of filing bankruptcy. As more individuals file bankruptcy, bankruptcy will tend to become more socially acceptable, thereby reducing the stigma attached to it. Increased advertising of bankruptcy services and the prevalence of celebrities filing bankruptcy also reduce the stigma of filing.
Senators Charles E. Grassley, R-Iowa, Robert Torricelli, D-NJ, and Joe Biden, D-Del., placed the Bankruptcy Reform Act of 1999, aka Senate bill 625, into play in the Senate on March 16th. Means testing is based upon the simple proposition that people should pay their debts if they can. It is a philosophy which says that bankruptcy should not be used as a way of avoiding obligations willy nilly. It=s goal is to ascertain which debtors have an income equal to or greater than the national median income for families of similar size, a net monthly income of at least $50 and the ability to repay at least 20% of their no priority unsecured debt over five years. If they do, then the chapter 7 debtor will need to convert its case to chapter 13. The House has a similar bill, HR833 which scrutinizes debtors to identify those who have the ability to pay at least $5,000 or 25% of their unsecured no priority debts over five years. The Trustee retains discretion to force those debtors who have an ability to pay despite an income below the national median. It is believed by some proponents of means testing that it will send an important moral signal to bankruptcy debtors that if they have the ability to repay a substantial portion of their debt that they should be required to do so. Also, it is believed by some that because high income debtors will have to repay greater amounts of their debts under means testing, they may be less likely to file in the first place. According to theory, eliminating these cases from the bankruptcy system will reduce the need to expend judicial and administrative costs on them.
It remains to be seen just what the final version of the bankruptcy reform act will entail. It is expected to pass sometime this year. While the debate continues over means testing it is a good time to consider your options before the new law passes.