How Revamping the Federal Bankruptcy Code Would Help Cut Future Debt
In October 2005, there was a stampede of people trying to file for bankruptcy relief before the new bankruptcy code went into effect. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) struck fear into the heart of debtors and bankruptcy attorneys alike. The changes were said to be sweeping including Means Testing to qualify for Chapter 7 relief, required debtor education prior to discharge and even credit counseling prior to filing for bankruptcy relief. Many individuals were misled and/or misinformed and believed that if they did not file before the deadline they would not be allowed to file later. Now five years later, those of us who work in the bankruptcy field see that most of the changes were easy to tolerate once we learned the new laws; however, some are more trouble than they have been beneficial. One serious problem with the Bankruptcy Code lies in debts that cannot be discharged.
According to 11 U.S.C. §523 , the debts that are not dischargeable through bankruptcy include but are not limited to:
- Most taxes
- Child support and alimony
- Student loans
- Debt obtained by fraud, false pretenses or a false representation
- Debt to a single creditor incurred for luxury goods or services within 90 days of filing
- For death or personal injury caused by the debtor while driving intoxicated
- Restitution payments under title 18 of the United States Code
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Other types of debts are also non-dischargeable in bankruptcy; however, the above are the most common. Typically, taxes, student loans and domestic support obligations account for the majority of debts that are not discharged through bankruptcy. Prior to 1998, student loans could be discharged through bankruptcy but Congress amended the Bankruptcy Code to make student loans that were federally secured non-dischargeable. Then with the passage of BAPCPA in 2005, student loans with private lenders were also non-dischargeable. Students graduating college are carrying heavy debt loads before they ever enter the work force in the form of student loans. These loans have high monthly payments and accrue interest during periods of deferment only increasing the amount owed under the student loans. Because they cannot afford the student loan payments, individuals begin to rob Peter to pay Paul increasing their debt with credit cards and unsecured personal loans. As their debt load increases and their income decreases or stays the same, they are forced to consider bankruptcy as an option. However, because they cannot discharge their student loans they will continue to be faced with finding the means to pay them after the bankruptcy case is completed. Many find themselves back in the same position years later with credit cards and personal loans creating an unbearable situation. Some again turn to bankruptcy (you can file again after 8 years) to rid themselves of their debt.
As with student loans, taxes are another debt that survives the bankruptcy and leaves the debtor in a position of finding a means to pay this debt. Again, many individuals will turn to credit again in an attempt to relieve themselves of this tax debt thinking they can pay the credit cards or finance companies this time. However, one serious illness or one job loss will leave them unable to pay their debts again. Perhaps instead of including taxes and student loans in the list of non-dischargeable debts individuals should pay a portion of the debt based on their assets and income. The Means Test introduced with BAPCPA caps the income level of individuals who may file for Chapter 7 relief to keep people from abusing bankruptcy discharges. However, that income level is relatively low with many people having a negative budget each month without taking into consideration a student loan or tax liability payment. By not discharging student loans or tax debts, the Congress is in effect telling these people that they do not make enough income to pay their normal living expenses but they will still be straddled with this debt even after they file for bankruptcy relief. This is counterproductive in the long term and should be re-evaluated to prevent a never-ending cycle of debt accumulation related to student loans and tax debts.
Nothing in this article is intended to be legal advice. Only an attorney can provide legal advice. Seek the counsel of an attorney before making any decisions about bankruptcy, student loans or tax debts.