On April 7, the House approved, 302-126, the Bankruptcy Abuse Prevention and Consumer Protection Act (S. 256). The Senate approved the measure on March 10 (see The Source, 3/11/05). It will now go to the White House for President Bush’s signature.
S. 256 would establish a “flexible means test” for debtors seeking to file for bankruptcy under Chapter 7, which excuses unpaid balances once debtors liquidate most of their assets. The aim of the measure is to make it more difficult for individuals judged as qualified to be able to pay some of their bills to walk away from their debts.
Under the bill, “domestic support obligations,” such as alimony and child support, would be classified as nondischargeable, which means they must be paid despite a bankruptcy filing. Although current law also lists alimony and child support as nondischargeable debts, S.256 would make support payments the first priority among nondischargeable debts. Under current law, support payments are ranked seventh. The measure also would require debtors to pay dischargeable debts, such as credit card charges, if the charge was incurred to pay a debt that must be paid under bankruptcy proceedings.
S. 256 would allow a debtor to legitimately claim as necessary, expenses incurred to maintain the safety of the debtor and the debtor’s family from domestic violence; expenses incurred for the care and support of an elderly, chronically ill, or disabled family member; and expenses up to $1,500 per child per year for public or private elementary and secondary school. Additionally, the bill would protect most tax-exempt retirement savings accounts from creditor claims and would protect most education savings account deposits made one year prior to filing for bankruptcy.
Rep. Judy Biggert (R-IL) urged her colleagues to support financial literacy provisions in the bill, stating, “Financial literacy goes hand in hand with helping our citizens of all ages and walks of life to negotiate the complex world of personal finance. Financial literacy can help Americans avoid or survive bankruptcy.” She added, “We pass many laws that require the disclosure of the terms and conditions of the rich mix of financial products and services that are available to consumers. Unfortunately for too many Americans, knowing the…financial products and services is challenging enough. However, understanding those terms and conditions is often an even greater challenge. Recognizing this fact, Congress included provisions in the Fair and Accurate Credit Transactions Act to address the issue of financial literacy. The Bankruptcy Abuse Prevention and Consumer Protection Act also contains important provisions addressing economic education and financial literacy. These provisions are designed to ensure that those who enter the bankruptcy system will learn the skills to more effectively manage their money in an increasingly complicated marketplace.”
Arguing that S. 256 would hurt families faced with high medical expenses, Rep. Zoe Lofgren (D-CA) stated, “Under the bill for the first time there will be a presumption that many of those families abuse the bankruptcy system. Under current law, people facing a medical bankruptcy can seek several forms of relief. Chapter 7 is by far the most common. Under 7, debtors are required to forfeit all of their property other than the exempt assets in exchange for having their debts extinguished. Current law already gives bankruptcy courts discretion to deny chapter 7 relief where the filing is found to be a substantial abuse. But unlike the bill, current law provides a presumption in favor of granting relief to the debtor. The other option is chapter 13 where a debtor is required to continue paying creditors. This makes it more difficult for debtors to get back on their feet.” She added, “This bill will hurt families facing medical bankruptcy because it will force them in to chapter 13. That is because it presumes that these families are abusing the bankruptcy system if they fail the means test. The means test starts with a family’s income and then subtracts monthly expenses permitted by IRS guidelines. But instead of using a debtor’s actual projected income, the means test uses the debtor’s average income over the prior 6 months. Thus, if a family’s bankruptcy was triggered by a loss of income resulting from a serious illness, the means test would still attribute the lost income for the purpose of determining whether the family is abusing the bankruptcy system.”
