Tuesday, March 22, 2005

The Hidden Bite of Bankruptcy Reform

The national media have done a pretty thorough job covering the bankruptcy reform legislation currently weaving its way through Congress. They've consistently pointed out that a major goal of the reform is to utilize a "means test" to direct debtors away from Chapter 7 bankruptcy (the proverbial "fresh start") and into Chapter 13 bankruptcy. In Chapter 13, the court assists in creating payment plans with creditors so that some or all of the debts may be repaid at some agreed-upon schedule.

One of the not-so-publicized consequences of the reform: As far as legal fees go, Chapter 13 bankruptcies are much more expensive to file than are Chapter 7. According to Jonathan Alpers, Esq., and his Florida bankruptcy blogs, legal fees for a Chapter 7 filing should be in the $750 area, plus the $209 court filing fee. For a Chapter 13 filing, though, the legal fees rise to an average of $2,500, plus filing fees. Judging from the Oklahoma cases I've been examining, these dollar figures seem spot-on.

If you think that the credit-card companies and other lenders who've been financially backing this reform didn't intend this as a "convenient side effect" to make bankruptcy more difficult, you're fooling yourself. The folks at MBNA and Citibank and all the others are well aware that the more expensive bankruptcy becomes to file, the less debtors will be inclined (or able) to pursue it.

By attempting to divert more debtors to Chapter 13 cases, the reform certainly makes bankruptcy a much more expensive option.


— Posted by Michael @ 12:31 AM

** Comments Closed on this Post **

Thoughts on my personal finances, goals, experiences, motivations, and accomplishments (or lack thereof).

My financial life began turning around when I took responsibility for it.
— Dave Ramsey


Start (2005-12): ~$21,900
Currently: $0
[About Our Debt Paydown]


Savings Goal: $15,000
Currently: ~$15,115
[About Our Liquid Savings Goal]