The fundamental revision of the bankruptcy code your bank says we need took effect this morning. All the news accounts are describing the rush of debtors who have been queuing at bankruptcy courthouses over the weekend, trying to make sure they got their petitions filed before midnight last night. Now let’s turn our attention to the plight of those unfortunate enough to need debt relief in the future.
They won’t be able to file under Chapter 7 (complete debt relief) if they can pay 25% of their debts. They will be required to complete credit counseling before filing and will also have to finish a course in managing their finances.
Bankruptcy lawyers will have all kinds of new requirements with which they must comply, which will drive many of them away from bankruptcy practice and will drive up legal fees for bankruptcy by 30-100%. The changes will have their most profound effect on the elderly, who will be hard pressed to pay the higher legal fees, and on young adults, who may have too much income to file for complete debt relief. Anyone who has at least $100 per month left after paying certain debts and expenses (and trust me, most filers will) will have to file a repayment plan under the restrictive provisions of Chapter 13 rather than the total relief under Chapter 7.
I don’t file any bankruptcies, and fortunately, I don’t expect to be filing bankruptcy anytime soon, so I don’t have a personal economic stake in this. I just see the brittle, shattered lives of the people who will be most directly affected by changes like this to the bankruptcy code. These are not the irresponsible and free-spending louts the banking industry kept describing as they campaigned for this bill. They’re middle-class hard-working Americans who want the same things you and I want, security for themselves and their families, a measure of coherence in their lives, and the ability to sleep well at night. They’ve been caught by surprise (as you and I could be) by an unexpected medical bill or the loss of a job, and they’re trying to cope. They will find it much harder now.
Mark my words. Long term, we will see a dramatic decrease in entrepreneurism as the result of this change. The American economy depends on the willingness of individuals to take risks, to open that restaurant, store, or service business, and to create jobs in the process. Over time, as ordinary Americans begin to realize just how dramatically the balance has been tilted, they will be less willing to risk to place themselves in a position where their business might fail. Do we really think we can maintain a vibrant economy built on people who want to work for the state and retire after 25 years with a good pension?