5-year-old federal bankruptcy reforms leaving some people deeper in debt

When tougher bankruptcy laws took effect more than five years ago, Congress wanted to raise the bar against perceived abuse of the system by ne’er-do-well debtors.


But since then?

Lawyers’ fees have more than doubled, online “credit counseling” is the norm, and the pace of personal bankruptcies is growing, nearing 2004 pre-reform levels.

The impact was not much — other than to make it more costly and make more hoops to jump through for anyone filing bankruptcy. 

One change is the means test in which debtor income over the previous six months is compared to the state median. Those deemed too wealthy are barred from liquidation in Chapter 7. Instead, they face a five-year repayment plan through Chapter 13 reorganization.  It’s a mechanical formula that uses the IRS standards.

Last month, Congress tried to edit the errors out of the 2005 reform, with the Bankruptcy Technical Corrections Act of 2010. It attempts to fix spelling errors, correct bad cross-references, and, in doing so, left at least a few ambiguities.


One question: When is the deadline for reform-ordered credit counseling — the day before filing or the day of filing?  No Answer.    I say day before.

Reform added mandatory credit advice for two reasons: to rule out other options short of bankruptcy, and to develop financial tools and budgeting ideas for the troubled debtors. 

These counseling courses are for those who have been financially irresponsible, not for those who have simply had a run of bad luck.  But Everyone must take them.

Across the United States, personal bankruptcies rose 9 percent in 2010, topping 1.5 million. That rate is forecast to go higher in 2011, according to the American Bankruptcy Institute.


Families continue to turn to bankruptcy as a result of high debt burdens and stagnant income growth.

Disaster strikes

Many families have been wedged between job loss and mortgage.

Credit rating? Not so good. Bankrutpcy does that to people. A lot of people need a chance to get back on their feet. As long as people are honest in the process, they ought to come out in better financial shape. You will recover in about 2 years.

Free consultation

Most bankruptcy attorneys provide a free initial consultation for people contemplating it.   Call me at (727) 410-2705 for a free  consultation in Clearwater, Florida.