Business Columnist Denounces Bankruptcy Reform

Houston Chronicle business columnist Loren Steffy wrote this unsympathetic account in August 2006, a year after Congress re-wrote American bankruptcy law.

Aug. 19, 2006
Bankruptcy reform a joke, but nobody is laughing

By LOREN STEFFY
Copyright 2006 Houston Chronicle

I hope the credit card companies are happy.

After almost a year under the so-called bankruptcy reform that Congress enacted at their behest, the law has proved to be what it appeared: a love letter to lenders.

Pitched as consumer protection, it was passed after eight years of political arm-twisting by credit card issuers who didn't want to lose fees from indebted customers when they filed for bankruptcy. You may have noticed that their concern about lending to people who can't pay hasn't stopped them from stuffing your mailbox with 25 offers a week for easy credit.

"All it's done is make it more time-consuming and more complicated and, for debtors, more expensive," says Randy Williams, a bankruptcy lawyer with Thompson & Knight in Houston. "Most people don't believe that this accomplished anything that it set out to do."

It hasn't lived up to the claims of Edward Yingling, president of the American Bankers Association, who said after it was enacted that it "strikes just the right balance" and would ensure the bankruptcy system remains "sympathetic and fair."

The law passed after a lot of gas-bagging from Sen. Orrin Hatch, R-Utah, about rampant abuse the likes of which he'd never seen, yet few others could see at all.

"A lot of people in the bankruptcy system never thought that the abuses that the credit card companies said were there were there," Williams says.

Since the law took effect in October, I've talked to attorneys who handle both corporate and consumer bankruptcies, to judges and to trustees, to people who live and work in the system every day, and I haven't found one who thinks this "reform" was a good idea.

The law has accomplished one thing, though. Fewer people are filing bankruptcy. In Houston, Chapter 7 filings, the kind most used by consumers, fell to 930 during the first six months of this year, compared with more than 5,500 during the same period last year.

Chapter 13 filings, under which consumers reorganize and repay some of their debts, fell by more than half, to about 1,300 from 2,900.

The trend is reflected in other bankruptcy courts around the country.

The 'means test'
Under the new law, consumers must pass a "means test" showing that they are unable to repay. The test was designed to decrease Chapter 7 filings, in which consumers liquidate and erase their debts, and force more consumers into Chapter 13.

Instead, it has simply scared people away. Williams likens the test to a tax return, and he says he's been in court sessions in which lawyers debated how the forms should be filled out.

The law also requires people to attend credit counseling sessions before they file, a provision Williams calls "a joke." It's created a cottage industry of credit counseling, but it doesn't differentiate among income levels. People who are living in poverty and unemployed, for example, need a different kind of counseling than those who have an income.

"It's more onerous on the people that the law ought to be there to help: the poorest people, the least-educated people," says Thomas Black, a local attorney and state chairman for the National Association of Consumer Bankruptcy Attorneys.


Going broke costs more
The additional bureaucracy has made it more expensive to go broke. Many local attorneys charged less than $1,500 for a routine filing. Now, that's more likely to be the bottom price because of the extra paperwork and time that the new law requires, Williams says.

"It's the people who don't have money for an attorney who suffer," Black says.

In an opinion that has gained national attention because it voices the frustration many feel with the law, Judge Frank Monroe of Austin gave a blistering rebuke in December.

Monroe had to reject a routine filing by a house painter who made about $20,000 a year and faced foreclosure on his mobile home.

The painter hadn't sought credit counseling before he filed, although he went after the filing. Still, Monroe said, the law gave him little choice because it requires counseling be completed before filing.

"Can any rational human being make a cogent argument that this makes any sense
at all?" he wrote in his ruling.

'Grossest of misnomers'
Monroe described the law as "absurd" and "inane" and said calling it consumer protection "is the grossest of misnomers."

He stopped just short of calling members of Congress toadies for the credit lobby.

"It was apparently an agenda to make more money off the backs of consumers in this country," he wrote.

And it succeeded.

To paraphrase Monroe's concluding sentence, Congress — and the credit pushers — must be pleased.

Loren Steffy is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays. Contact him at loren.steffy@chron.com. His blog is at http://blogs.chron.com/lorensteffy/.