Bankruptcy law gets tough on debtors: latest legislation seeks big payback for creditors

Black Enterprise, July, 2005 by Robyn D. Clarke, Tykisha Lundy

For decades, declaring bankruptcy has been a last-resort measure to re-establish financial standing for economically distressed individuals and families. Now, a new, controversial law--the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005--will make it harder to seek protection under Chapter 7 of the bankruptcy code, which eventually erases most unsecured debt after a surrender of some resources. Most provisions of the bill, which was signed into law by the president April 19, will take effect Oct. 17.

Critics of the legislation say the provisions are one-sided in favor of corporations' bottom lines and will likely punish those struggling most to get out of debt. These would include the elderly; individuals rocked by job loss, divorce, or medical expenses; and moderate and low-income families, composed largely of African Americans and other people of color.

"The Congress members of both parties who are embracing these punitive measures for working families are dangerously out of touch with the grim economic realities faced by ordinary families," says Tamara Draut, director of the Economic Opportunity Program of New York-based think tank Demos.

"African Americans have higher levels of debt," maintains Rep. Stephanie Tubbs Jones (D-Ohio), citing statistics that the average African American family's debt is roughly 30% of its assets, compared to 11% for a white family. "African Americans and Hispanics are much more likely to go bankrupt." Data from the Drum Major Institute for Public Policy, a nonpartisan, nonprofit organization dedicated to progressive social and economic change, indicates that blacks are five times more likely than whites to file for bankruptcy.

The Bankruptcy Act will implement a means test to determine ability to shell out at least a portion of arrears. Those who are deemed able to pay will be required to file under Chapter 13, which facilitates repayment of debts to creditors. Personal bankruptcy filings have risen sharply, from 200,000 in 1978 to nearly 1.6 million in 2004--a staggering increase of 800%. Currently, filing rates are highest in Tennessee, Alabama, Nevada, Utah, Georgia, Indiana, Arkansas, Ohio, Mississippi, and Oklahoma.

Republicans overwhelmingly support the Bankruptcy Act, which will primarily benefit credit card companies such as Visa, MasterCard, Capital One, and Citicorp, which have been lobbying for the bill for years. Supporters, including 10 out of 41 voting members of the Congressional Black Caucus, say the bill will prevent unwarranted escape from financial obligations under bankruptcy protection. "For some, it is a way to avoid personal responsibility," asserts Sen. Orrin Hatch (R-Utah). "There is something inherently unfair about denying full restitution to creditors."

Creditors will not be permitted to confiscate funds from individual retirement accounts, 401(k) plans, pensions, and age/illness/disability-related benefits including Social Security. Score one for the individual, thanks to a Supreme Court ruling in April, less than a month after the Senate passage of the Bankruptcy Act.