CUNA Questions Early Indicators Of Effects Of Bankruptcy Reform Bill

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CUNA issued a statement last week indicating it remains too early to gauge the effects of the 2005 bankruptcy reform bill, which makes it harder for consumers to walk away from debt.

CUNA Senior VP-Regulatory Compliance Kathy Thompson stated that "recent reports on the low numbers of potential bankruptcy candidates who are instead moving into debt-workout programs may not be representative of the numbers a year or so from now."

At issue is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which went into effect Oct. 17, 2005 after years of credit union lobbying. The new law includes a requirement that consumers receive basic financial counseling before they can file for bankruptcy. The provision, Thompson says, is intended to help a consumer assess his financial situation and to see he or she may have options instead of filing for bankruptcy.

CUNA cited a Washington Post report that said that during the first 13 weeks under the new rules, only 4.5% of debtors counseled by one company interviewed had sufficient income to be considered for a plan to pay back debts over a few years, rather than heading straight into Chapter 7 bankruptcy.

CUNA said those early numbers likely reflect a specific subgroup of debtors: "You have to remember people filing in the weeks just after the law went into effect are likely to be the most desperate cases, since they didn't even join the flood of people who filed under the old law."

"Certainly, the people who rushed to the courthouse in early October included many debtors who will qualify for Chapter 7 under the old law but will be required by the new 'means test' to file a work-out plan under Chapter 13 under the new law," said Thompson. "It's this group that we hope will particularly benefit from pre-filing counseling and consider whether they may want to try to work out a debt repayment plan outside of Chapter 13."

"It's hard to assess at this point whether the 4.5% in the survey will be typical," noted Thompson in remarks that originally appeared on the trade group's website. "CUNA, which supported the bankruptcy reform efforts, is on record as saying that we think that no more than 10% of the debtors who qualified for Chapter 7 debt relief under the old law will be required by the means test to withdraw their bankruptcy petition or convert to a Chapter 13 plan.

"The reality is that people who are overwhelmed by debt due to medical problems, divorce or just living beyond their means will still qualify for Chapter 7 relief in the bankruptcy courts."

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