There’s nothing that incenses me more than the misinformation (…or perhaps better said, outright lies) that are being told about the new bankruptcy laws. I came across a press report posted on the website for WKOW out of Madison, Wisconsin. It’s bad enough when a reporter gets the facts wrong, but it’s even worse when their source is similarly wrong.
The most glaring untruth is the quote reportedly from Michael Gutter, a University of Wisconsin Extension Financial Specialist: “There's a new needs-based test put into place on chapter 7 that will essentially eliminate most middle-class families from being eligible for bankruptcy.”
The fact is, a means test is applied to those seeking bankruptcy who have mostly consumer debts. The means test does not eliminate bankruptcy eligibility. In theory, it is designed to determine whether the filing of a Chapter 7 petition by those who (from a bankruptcy attorney perspective) “fail” the means test raise a “presumption of abuse.”
There’s not enough room here for me to discuss all of the factors which can help a debtor overcome the presumption of abuse. Suffice it to say, the “presumption of abuse” does not result in the doors of the bankruptcy court being locked for needy and honest debtors.
Gutter also reportedly states: "Prior to filing for bankruptcy, families will need to complete financial education and those being moved into chapter 7 or 13 will need to work with a financial counselor to actually establish that repayment strategy." First, prior to filing bankruptcy, debtors (not the families, which implies the kids have to do it as well) need to go through credit counseling; a subject I have discussed in a number of articles here. The debtor education requirement takes place after the filing, and is a requirement that debtors need to fulfill to obtain a discharge.
As for “…working with a financial counselor to actually establish [a] repayment strategy…”, I can only assume that this refers to the pre-bankruptcy credit counseling requirement. While in theory, part of the credit counseling process is an examination of income, expenses as well as assets and liabilities, the fact is there is no requirement to establish some repayment strategy….and frankly, virtually all people try a number of repayment strategies which ultimately fail…which is why they are contemplating bankruptcy. The statement also ignores the NACBA study which decried the credit counseling requirement as, among other things, an ineffective deterrent to bankruptcy filings.
The Myths
Finally, there’s this gem. Gutter reporting states: "We'll see a lot more people trying to take responsibility and be proactive about their credit, realizing that bankruptcy is no longer an option that it was for many individuals. The impact, of course, for all bankruptcy is that it will appear on your credit report and significantly impact your credit score for up to seven years." Let me start with the credit report claim.
Bankruptcy can appear on the credit report for up to 10 years, not 7. Can it impact the credit score? Sure. In some cases, it can actually help it. Whether it has a “significant impact” largely depends on what the debtor’s goals are, and it largely depends on the lender who is considering the credit.
If the debtor wishes to obtain a no-money down mortgage within six months of the bankruptcy, the bankruptcy is likely to have a significant “negative” impact on how the lender views the credit report. But if the debtor wishes to obtain a mortgage within a few years after bankruptcy, after the debtor has been able to save for a down payment, and after the debtor has demonstrated credit worthiness (such as by continuing car payments), the bankruptcy is likely to have a “positive” or even a “neutral” impact on how the lender views the credit report. Additionally, the availability of money to borrow is also a factor that no consumer can control. Ultimately, such a broad based statement standing alone only perpetuates the myth that bankruptcy is not a viable option.
But the most galling statement – and one that sticks in my craw – is that “we’ll see a lot more people trying to take responsibility….” Oh please. As most of the people that come into my office to see me, at least one of three things happened to them: a medical problem, a job loss or a divorce (or death of a spouse or income earner). Of course, there are others who file bankruptcy: people who get scammed, people who get their identities stolen, and people who are the victims of predatory lending practices. In virtually all of these situations, the cause of the bankruptcy was beyond their control, or was something that could only be seen in hindsight. Dropping such buzz-words as “responsibility” is a feeble and transparent attempt to guilt people into paying debt that they simply cannot afford. There, but for the grace of God, Mr. Gutter.
I welcome a healthy debate based on accurate facts. But when press reports that are designed to inform people struggling with debt are laden with untrue facts and myths as well as a dose of righteousness, don’t expect me to sit quietly.
