Frantic National Rush To Personal Bankruptcy

By James Donahue

Oct. 14, 2005

Hoards of financially strapped Americans, deep in debt and many of them either out of work or forced to accept low-paying jobs, are rushing this week into U.S. Bankruptcy Court.  

That is because a new law goes into effect Monday that will make it harder for working class Americans to utilize this court as a last resort for getting out of debt.

This new law, a major revision of the bankruptcy code, was passed by Congress and signed into law by President Bush after it was pushed by banks, credit card companies and retailers.

The law won’t do away with bankruptcy options for big business and the rich, but it is going to make it difficult if not impossible for middle income families to wipe out debts under the old Chapter 7 form of escape. No longer will bankruptcy judges have the option to sweep away a man’s debts with the stroke of a pen.

Instead, the law directs most debtors into Chapter 13 which demands debt counseling followed by payments to creditors under terms approved by a judge.

There will be no “starting over” for families with over-extended credit card payments, car payments and house payments that suddenly find one or both of the bread winners out-of-work or steeped in unexpected medical bills unless they can show extreme hardship.

Small businesses will have less flexibility in writing reorganization plans without interference from creditors and will be expected to pay off suppliers.

The uncertainty of the new law is pushing many consumers into filing for bankruptcy before it goes into effect on Monday. William McLeod, a Boston lawyer, said some of his clients might have tried to hang on longer. But he said the combination of rising energy costs, new increases in minimum monthly credit-card payments, and concerns about the new law pushed them into filing now.

“Bankruptcy protection will still be there after Monday,” McLeod told the Boston Globe. “But it’s going to be an interesting ride to see how this law evolves, how the courts interpret it, and how protected or unprotected people in debt will be.”

The timing of this law change is hitting many Americans at a time when they are reeling under the effects of natural disasters, getting hit by sky-rocketing bills for home heating and fuel for operating cars, trucks and heavy equipment, and U.S. factories are outsourcing for cheaper labor.

All of these factors are combining like ominous storm clouds on the horizon for most American households.

It appears that the laws are carefully crafted to protect the banks and lending institutions, while leaving the average laborer out in the cold at a time when he needs them the most.