Thomas Frey: Legislation passing through the Senate this week, hailed as a long overdue policy tightening to prevent debtors from “gaming the system,” will have far reaching ramifications, most of which won’t become obvious for many years to come.
From 1983 to 2003, bankruptcy filings have increased 500 percent. While this statistic signals a cause for alarm, the notion that the root cause of this problem stems from devious consumers is tragically misguided.
At the heart of the proposed new law is the creation of a “means test” to help sort out those who can afford to pay back some portion of their debt and those who can’t. Under the current system, individuals can file under Chapter 7, which allows many to keep some protected assets while discharging their debts.
Under the proposed new bankruptcy law, individuals with incomes above the state median will have to present their case to a bankruptcy court which will determine whether the filing should be dismissed for abuse of the system or converted to a repayment plan under Chapter 13.
When bankruptcy was conceived, it was supposed to give an individual a fresh start. This not only ends the idea of having a fresh start, it will inadvertently end up driving people into an underground economy where people operate in an “off the grid” cash-only society.
The exponential nature of complexity is alive and well. Adding layers of complexity is seldom good, driving cost hirer, increasing confusion while at the same time handing and addition piece of our freedoms over to a judge with wide ranging authority.
Today, roughly one third of the general public lives without a bank account. We’ve created a banking system that doesn’t work for 33% of the people. The new law will most likely cause that number to increase.
So if massive numbers of people begin to join the ranks of the unbankable, what new types of underground systems will be created to service their financial needs? Since this community will be operating outside the bounds of the law, who gets to run this operation?
The medical profession may be the most affected by the proposed changes in the law. According to a recent Harvard study between 46 percent and 54 percent of personal bankruptcies are the result of illness or medical bills.
Hospitals, which often are owed the debt, may turn to collection agencies rather than writing off the debt. It means more people will be handed off to collection agencies, forcing people to go underground – untraceble cell phone, no physical residence, under the radar.
And people who operate under the radar, don’t pay taxes, because suddenly all systems are failing them.
The IRS has already done a great job of creating an underground economy. This will just be another feeder mechanism.
The current bill is skewed towards corporate interests and does not place the needed restrictions on abusive lending by creditors, especially those who target vulnerable consumers.
Creditor practices are driving many consumers to default. By the time many of these people land in bankruptcy, they owe more in interest and fees than they do on the original loan.
One of the major drivers in all this will be the additional legal expense imposed on filers because of the sheer complexity of the new law. Many won’t be able to afford it, and will simply opt to become part of the new underground.
Bankruptcy is never the only issue affecting a person’s life at any given moment. Often times it’s accompanied by divorce, loss of job, health problems, and a wide range of other family issues. This is a very complicated matter, and certainly the filer needs to be held accountable for reasonable levels of restitution. But there is far more wrong with the system than debtors “gaming the system”. This bill simply helps the rich get richer without addressing the real problems.
