Are Personal Bankruptcy Rules Too Tough on Debtors?

Many Chicago-area residents remember the bankruptcy reform that took effect about a decade ago. While reforms have lowered the number of consumer bankruptcy filings, new evidence suggests that the rules surrounding personal bankruptcy simply are too tough on debtors, according to a recent article in The Economist. To be sure, “the reform may have done more harm than good.”
Aims of Consumer Bankruptcy Law
In general, “the aim of bankruptcy law is to give people relief from unpayable debts.” Indeed, many Americans face a financial crisis when they learn they’ve lost their jobs or have unexpected medical expenses. If bankruptcy law works the way it should, it offers consumers in these situations the opportunity to have a fresh start, particularly in the case of Chapter 7 filings. However, the ease with which Chapter 7 allows debtors to “wash away debts” caused credit card companies to lobby for bankruptcy law reform.
About 10 years ago, credit card companies argued that Chapter 7 bankruptcy permitted “spendthrifts [to] abuse the system.” In response, bankruptcy laws got tougher. “The idea,” according to The Economist, “was to shift people to a Chapter 13 bankruptcy, where they would have to repay some of the debt.” And in the early years of the reform, statistics showed that “Chapter 13 filings rose relative to Chapter 7 ones.” Indeed, according to a report from researchers based at the New York Federal Reserve and Columbia University, the reform “led to a permanent drop in the bankruptcy rate.”
But have reforms begun preventing bankruptcy law from fulfilling its aims? According to Will Dobbie, a researcher based at Princeton University, and Jae Song, a researcher from the Social Security Administration, a permanent drop in bankruptcy filings doesn’t always mean good things for the economy.
Debtor-Friendly Bankruptcy Laws Can Have Positive Outcome for Consumers
Dobbie and Song emphasize in their research that “easier bankruptcy laws have good microeconomic effects.” How so? Their investigation into consumer bankruptcy proceedings has led them to some interesting conclusions. For example, once creditors cannot claim part of a debtor’s salary (one of the outcomes of filing for consumer bankruptcy), debtors tend to have more incentive to work. According to Dobbie and Song, “on average, those granted bankruptcy earned over $6,000 more in the subsequent year than similarly placed plaintiffs who were rejected.”
Some consumer advocates argue, however, that making bankruptcy laws friendlier toward debtors could lead credit card companies to increase interest rates, since they’d be “exposed to bigger losses.” At the same time, most researchers believe that creditors likely won’t jump to increase interest rates, “lest they attract the dodgiest customers—those not put off by high rates because they know that, with luck, they won’t have to pay their debts back.”
Consumer debt continues to rise, and it’s more difficult than it used to be to be approved for a bankruptcy. Knowing your rights and responsibilities when it comes to consumer bankruptcy can be difficult. It’s always a good idea to discuss your situation with an experienced Oak Park bankruptcy lawyer who can help you to better understand your options. Contact the Emerson Law Firm today to learn more about how we can assist you.
See Related Blog Posts:

Comments

Post a Comment

Popular posts from this blog

Payday Lending and Predatory Lenders in Illinois

If you are in substantial debt in the Chicago area and are living in a paycheck-to-paycheck cycle, you may have taken out a payday loan to make ends meet. While payday lending is illegal in a number of states due to the predatory nature of these loans, it remains legal in Illinois. As a result, many debtors in the state have used payday lenders, and far too many of those borrowers cannot repay what they owe. According to a recent article from Progress Illinois , consumers have filed complaints about payday lenders in the state, illuminating a need for federal rules that address harmful lending practices . Predatory Payday Lenders and Protections for Consumers Due to the perceived predatory nature of payday loans, twelve states in the country have banned these lenders from operating completely, according to a fact sheet from loans.org . The states that currently have laws prohibiting payday lenders from operating include Arkansas, Arizona, Connecticut, Georgia, Mary...
Read more

Phantom Debt Collection Scams on the Rise in Illinois

Have you been contacted by a person claiming to be a debt collector who is seeking to recover a debt you allegedly owe? If so, you are not alone. According to a recent report from CBS Chicago , such parties claiming to be debt collectors are on the rise, and they are scamming Chicago-area residents. These alleged debt collectors are part of schemes known as “phantom debt collection scams,” since they involve the attempt to collect on a debt that the consumer does not actually owe. How can you avoid becoming a victim in a debt-collection scam ? What should you do if you have been targeted by a fake debt collector? How Do Phantom Debt Collection Scams Work? Now, you might be thinking to yourself: I would never agree to make payment on a debt that I did not owe. But the scam is not always that simple. Parties at the center of debt-collection scams often target consumers who do actually owe debts (to someone or to some entity), and they prey on the fact that these c...
Read more

New Information on Debts That Bankruptcy Cannot Discharge

If you are thinking about filing for bankruptcy in the Oak Park area, it is important to know that certain kinds of debts cannot be discharged in a bankruptcy case. Under U.S. bankruptcy law, these are known as non-dischargeable debts, or exceptions to discharge. There are certain types of debts that have long been identified clearly as non-dischargeable debts, while there are misconceptions about other types of debts that may or may not be dischargeable. As an article in CNBC discusses, the U.S. Supreme Court recently issued a ruling in the case of Bartenwerfer v. Buckley , which clarifies that debts incurred due to another party’s fraud cannot be discharged in an individual’s bankruptcy case. Our Oak Park bankruptcy attorneys can explain the Court’s recent ruling and provide you with additional information on dischargeable and non-dischargeable debts. Supreme Court Says Debt Incurred Due to Another’s Fraud is Non-Dischargeable The recent Bartenwerfer case involved a debtor attempti...
Read more