Solution After Bankruptcy Bill: Go Underground

I don’t know if you will have heard it here first, but I can say you’ll hear it here in clear, unequivocal language. The bankruptcy changes your Congress probably will approve soon and your President plans to sign will hurt poor people more than rich people; will make it harder for the least, the last, and the lost to deal with unexpected financial setbacks; and will drive more Americans into the underground economy.

I have never filed a bankruptcy on behalf of a client or anyone else, and I have no financial interest in the ongoing conversation about bankruptcy. Working with people going through divorce, however, I know something about the problems real people face with money. Here’s how this is going to work.

The bankruptcy bill requires attorneys filing a petition for bankruptcy to investigate the accuracy of the statements their clients make. That sounds inoffensive enough; after all, shouldn’t a lawyer make some effort to ensure that what he or she files is accurate?

The problem emerges only when you think about how bankruptcy works in the real world. If the attorney is filing a bankruptcy for a rich high-roller (the person the bankers want us to envision when we think about people filing bankruptcy, and the one this legislation purports to restrict), the law won’t have much effect. The rich high-roller will be paying an attorney’s fee of several thousand dollars, and it’s easy for the lawyer to include some investigation cost with the other services needed.

No, the person this legislation will clobber is the single mother who makes $22,000 per year and has a manageable amount of consumer debt, who suddenly has an unexpected medical emergency that balloons her debt to $50,000. Under the present system, she would be able to hire a lawyer and declare bankruptcy (lawyers fee of, say $1200), sharply restrict her access to credit, and survive. Under the new legislation, however, the bankruptcy lawyer might have to charge her $1,000 more to cover the cost of the mandatory investigation. That’s not a big change for the high-roller. For the single mother, however, it’s the difference between a realistic option and a distant dream.

So what is she to do? Unable to pay the debt, and unable to pay the fee to get legal relief from it, her choice will be clear. She will go underground. She will work intermittently, and always for cash. She will stop paying federal and state taxes , and she will stop contributing to Social Security. If she owes child support, she will stop paying it. And the longer she continues doing this, the more painful it will be for her to leave the underground economy and return to legal status.

And lest we think she will be merely an isolated statistic, consider that more than 1.5 million consumers filed for bankruptcy protection last year. And research shows us that the bulk of those filing looked much more like the single mother than the high-roller. And unlike the case today, in which filers immediately become full-fledged tax-paying, child support-paying, Social Security-paying consumers, the longer the new bankruptcy law remains in effect, the more poor people will be driven underground — permanently.

How will we deal with that? I have some ideas, but that’s a subject for another day.

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