< meta name="DC.Date.Valid.End" content="20050825"> Amendment Nine: S. 256

Monday, February 21, 2005

S. 256

The so-called "Bankruptcy Reform Act" or, more exactly, "Bankruptcy Abuse Prevention and Consumer Protection Act" has been around for quite awhile. I've refrained from posting about this because, as far as I can tell, most people commenting on it have not actually read it. Liberals today are doing a lot of that, talking about stuff without doing their homework. Colleagues of mine, however, have all but called me a chicken. So here goes...

I find the unintended effects of this bill the most amusing. Supposedly the GOP is the party of the "great interior", or as most pundits say today: "red state America." That includes the South, the rural Midwest, and the Mountain West. Cruel irony of Shakespearean magnitude that the leading state for personal bankrutpcy filings is, Utah! After Utah are a host of red states including Indiana, Mississippi, and even Ohio. Red America is going to get smacked by this bill. But, when you vote for a guy whose family is from Maine, was born in New Haven, went to Yale and Harvard, and is known by the nation as a Texan, would you expect anything less than irony?

Another factoid. Senior citizens are the fastest growing segment of new bankruptcy filings. Why? Medical expense. Just something to keep in mind.

In the bill itself are a number of interesting provisions. The most discussed, and least necessary provision is the means-test. The means-test denies debtors the use of C. 7 if they meet certain economic criteria. These debtors are presumed abusers and the criteria used to evaluate them are based on IRS tax and audit rules. I've been an outspoken opponent of confusing the tax law with the bankruptcy law (even on this blog I've noted my disgust at this tactic). Lawyers do it, legislators do it, accountants do it, everyone is doing it. But its a big problem. Bankruptcy is a mechanism used to permit the orderly repayment of debts by an estate that is overburdened by debt. Tax law and the Internal Revenue Code are mechanisms used to increase revenue for the government. The aims are different, and using any standard from one in the other arena is like bringing a baseball glove to a football game. Also, the means-test goal, to allow the judge to kick cases for abuse, is already in existence in sec. 707(b). So, its just stupid, everyone knows this. The provision was written by and for high-risk (eg., high yield) consumer credit agencies.

Other provisions of note: there's a million dollar plus carve out for IRAs and education accounts (guess who has $1M in their IRA... as a hint, it is NOT the senior citizens going bankrupt because of prescriptions). Interestingly, the million dollar carve out was deemed a bit "harsh" by some of the bill's sponsors, so they graciously left some discretion for the judge if raising the max would be "in the interest of justice." Also, those of you who rent your residence, don't go bankrupt because your automatic stay does not protect where you live. This is most amusing because the commercial property rules remain more difficult for landlords to get around. Message appears to be, you can sleep at work. Another part actually expands the oft-abused homestead exemption, while those in C. 13 are prevented from lien-stripping. ADR is an out for debtors, as is an additional hearing challenging the fairness of the means test, but all in all, debtors in red America are going to find life a little more difficult.

Let me predict, if this all becomes law, the business of distressed M&A and vulture funds in general will be, on the whole, less attractive than offering high-rate credit cards via direct mail to every trailer park in Indiana. Just on the basis of simple negotiating leverage, were this law passed, I would rather be a predatory lender to blue-collar America than a hedge fund looking to restructure ineffecient businesses. Now you know where the money is going.