Wall Street Journal on New Bankruptcy Law

The Wall Street Journal posted an article claiming (or at least inferring) the new bankruptcy law is a success and denigrating those who opposed the law.

Henry Sommer, president of the National Association of Bankruptcy Attorneys (and co-editor of Collier on Bankruptcy) posted the following response:

“I was not surprised to see the Journal’s editorial page echo the financial services industry’s talking points on the recent bankruptcy legislation. Unfortunately, you have your facts wrong. You don’t state the source of your figures supposedly showing a decline in debtors’ incomes, but the numbers most frequently being reported for debtors who have
filed in the last year reflect those debtors’ “current monthly income,” a new statutory term that excludes various types of income and therefore cannot meaningfully be compared to the income reported in cases filed before the legislation was enacted.

“In fact, our members report that the vaunted new means test is having negligible effects in terms of pushing higher income debtors into chapter 13 for the simple reason that there were never many debtors who could afford to pay their debts. The same types of debtors are filing chapter 7 cases as before the legislation. Consumer credit counselors, to whom every individual debtor must go before filing a bankruptcy case, also report that virtually
no debtors they see are able to pay their debts.

“The truth is that the biggest effect of the new law is the substantially increased cost of filing bankruptcy cases, borne by all debtors and acknowledged by everyone. These costs have limited access of lower income families to much-needed relief from financial problems caused by medical expenses, unemployment, and divorce. They are the result of unnecessarily
increased government bureaucracy and onerous new paperwork requirements, and would have been condemned by the Journal had they been imposed on businesses instead of struggling families.”

My own view is that those who prophesied the end of bankruptcy before the bill took effect were engaging in a bit of hyperbole. The law has some serious problems and doesn’t really fix a whole lot. It does make it harder and more expensive for people to file bankruptcy, simply because it creates more hoops to jump through. But (speaking from my own experience) the means test that the WSJ is boasting about in this article results in wildly inconsistent results. For example, let’s say a salesman is paid on commission only. He usually makes about $12,000 a month. However, his commissions go down to about $6,000/month for five straight months before going back up to $12,000. The means test says he has to use $7,000 as his monthly income, even though he might make $12,000/month for the next year. Most likely, he will have expenses over $7,000/month and would satisfy the means test for Chapter 7 or have a low payment for Chapter 13. The WSJ’s claim that the new law is successful is premature.

But, as anyone knows who has read something in the papers about their profession, newspaper reporters usually don’t get deep enough into a topic to really understand it and consequently, they usually have at least some level of inaccuracy in their reporting.