By Dennis Quick, Charleston Regional Business Journal
May 2, 2005
U.S. financial institutions and other creditors hail the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 as a measure that will help limit the loss of money owed them and subsequently save consumers from paying higher interest rates and increased costs for goods and services.
The new bill, which President Bush signed April 20 and will become effective in January, aims to make bankruptcy filing more difficult for people seeking a way to avoid paying their debts.
It is too soon to say how the bill will affect small businesses, although experts speculate the impact will be more positive than negative.
“In the long run it will be a plus for small businesses,” says Frank Knapp, president and CEO of the S.C. Small Business Chamber of Commerce in Columbia. He adds that many small businesses extend credit to other businesses and can suffer a great financial blow if those businesses rely on bankruptcy as a means of avoiding repayment.
“That’s why this bill can be a positive,” Knapp adds. “It’s a way to help those small businesses stay in business.”
Scott Woods, president and CEO of South Carolina Federal Credit Union, agrees, pointing out that small businesses issuing credit get hit much harder from non-paying debtors than do large, corporate lenders.
“It’s more difficult for the florist on the corner to sustain losses from debtor bankruptcy than it is for General Motors,” Woods says.
“The bill helps financial institutions, retailers, service companies, anyone who extends credit,” Woods continues. “It benefits a lot of folks across the board and is good for the average consumer.”
More than 1.6 million bankruptcies were filed in the United States last year, costing the average American consumer an additional $400 in bankruptcy expenses passed down from creditors, retailers and service providers, Woods points out.
The new law requires bankruptcy filers to take a “means” test to determine if they have enough money to repay at least some of their debt. The test compares the filer’s income with the average income in the filer’s state. If a person filing for bankruptcy has an income higher than the state average, the law requires that person to pay back part of the debt through a payment system.
Additionally, the law requires that people considering filing for bankruptcy enroll in bankruptcy education to learn bankruptcy’s financial repercussions, including the impact it has on the filer’s credit rating. Financial institutions will provide the education.
“The idea is to make filing for bankruptcy a burden,” says Charleston bankruptcy attorney Michael Drose. “It’s going to force more people to file Chapter 13.”
Chapter 13 bankruptcy requires part of the debt be repaid through a court-ordered repayment plan. Chapter 7 bankruptcy-the bill’s primary target-eliminates the debt because the filer has no assets to repay it.
“We’ll see record bankruptcy filing until the law is enacted,” says Drose. Credit counselors and bankruptcy lawyers most likely will see a spike in business, he adds.
Drose says he believes the new law will hurt people who suffer catastrophic financial losses due to illness or a sudden unemployment and, therefore, have a legitimate reason for bankruptcy filing.
Woods says the new law will protect those very same people “who have an honest reason” for filing for bankruptcy by ridding the system of bankruptcy abusers.
“No one will really be able to assess the legislation until a few years out, when we will have some data to look at,” says Roxanne Delaurell, an accounting and legal studies professor in the College of Charleston’s School of Business and Economics.
Delaurell adds that when the bankruptcy code was amended in 1984 to reduce bankruptcy filing, the reverse actually happened.
“A study done 10 years later showed that bankruptcy filings actually increased after the amendments,” Delaurell says.