Just as some folks read a book and come away with different interpretations, so too it seems will CUNA and Jim Blaine continue to disagree on the merits of the Bankruptcy Abuse Reform Act that is again before Congress. "Read the whole book," advises Mr. Blaine in his latest opinion column on the legislation (CU Journal, March 24, "10 Questions Every Credit Union Should Ask Itself Before Supporting the Bankruptcy Reform Bill").
The CUNA Governmental Affairs Committee has been dealing with this "book" for about seven years now. Is it perfect? No, but I've never seen that claim made. The operative word is balance. It's important to remember this bill, like most legislation, seeks to balance the interests of many parties-creditors, courts, bankruptcy trustees and consumers, and includes provisions offered by each of these groups. Passage of the bill won't cure the bankruptcy epidemic we've experienced in recent years, but it should provide strong medicine for egregious cases of abuse.
Hard To Swallow
There are some elements of the bill credit unions may find harder to swallow. For example, reaffirmation disclosures, agreements and procedures are detailed to a much greater extent than under current law. However, the right of credit unions to seek reaffirmation of debts is intact. More extensive Truth-in-Lending disclosures could require costly operational changes for some credit unions. But on balance the legislation contains a host of provisions that make the current system more fair and thus warrant the support the legislation is getting from CUNA, the leagues and the vast majority of credit unions.
A detailed section-by-section analysis of the bill by CUNA's lawyers and lobbyists, and an explanation of CUNA's reasons for supporting it have long been available on CUNA's website, www.cuna.org (from the home page click "government affairs." then "legislative affairs/issues 2003," then "bankruptcy").
How Bill Will Narrow Abuse
Here are some of those reasons, which illustrate how the bill will narrow the abuse that too frequently occurs in the bankruptcy system today.
* The bill establishes a "means test" for the first time as a way to assess if a person's financial condition truly warrants filing for bankruptcy under Chapter 7 or whether a reorganization plan under Chapter 13 would be more appropriate based on the person's income and expected reasonable expenses. Most cases, filed due to job loss, divorce, medical problems and the like, won't be affected by this provision. CUNA in testimony to Congress has noted that less than 10% of the people who file will be affected by the means test. But with over a million people declaring bankruptcy annually, that's still quite a large number of people who have the means to repay at least some of their debt. And the judge will still have the discretion to look beyond the numbers to see if someone should remain in Chapter 7.
* The bill places strong emphasis on financial education, codifying the principle that people deserve additional information and assistance to understand what bankruptcy means and how to avoid financial problems. Notices must be supplied about the differences between Chapters 7 and 13. A financial management course must be completed before a bankruptcy is discharged. Counseling from an approved agency must take place within six months before filing. A new disclosure will be required giving people borrowing money and reaffirming debts a better understanding of their financial obligations.
* The bill takes specific aim at those who attempt to defraud creditors and the bankruptcy court. Prospective debtors will be informed of penalties for fraudulently concealing assets or making a false statement. So-called "debt relief agencies" would have to stop making misleading statements the benefits of filing for bankruptcy. People whose financial circumstances haven't changed but who try to file repeatedly to protect their collateral will be deterred. Debts greater than $500 on luxury goods or services incurred within three months of filing will no longer be eliminated. And the government will establish audit procedures to verify the accuracy of information debtors provide to the bankruptcy courts.
* There's more in this area: The debtor will have to provide the court with copies of his recent payroll receipts and federal income-tax return. Some new constraints will be imposed on how debtors can use a state homestead tax exemption. And a person filing for bankruptcy with, for instance, an auto loan, will have to take timely action to work out a reaffirmation with the lender, pay the full fair-market value of the car, or return the car.
Also Worth Noting
Before I leave the discussion of repayments and priorities, I would like to point out that the reform bill improves on current laws regarding cramdowns. The reform contains a provision that should result in fewer cramdowns and more money being paid on secured claims and less being paid on unsecured claims. It is not true that car dealers will gain an advantage over credit unions under the proposal-in fact, credit unions will also benefit from changes by being able to recover more on car loans.
Also, the reform corrects a defect in the law that not many proponents of the status quo like to talk about. Currently, attorney's fees receive top priority, followed by child support and alimony payments as the seventh (!) priority. Under new law, child support and alimony would be at the top of the repayment list, after trustee fees are settled.
The bill improves the bankruptcy process. New procedures will allow creditors to better participate in the case and avoid violating the automatic stay. A debtor who fails to timely file required information on assets, liabilities, income, expenses, etc., can have his case dismissed so cases do not languish. And specific timetables when trustees and judges are to take certain actions will be set to help move bankruptcy cases along more efficiently.
How Bill Will Narrow Abuse
All tolled, these legislative changes will address a number of bankruptcy-related abuses and procedural problems that credit unions have identified over the years. That is why the CUNA Governmental Affairs Committee, after the legislation was derailed in the waning moments of last year's legislative session, did not hesitate to reiterate its support for passing the bill in the new Congress.
The problem is real. Committee members have seen evidence of bankruptcy abuse first hand in their credit unions, as Lucile Beckwith, CEO of Palmetto Trust FCU in Columbia, SC, recounted in these pages not long ago. And we continue to hear about it time and again when talking with credit union colleagues around the country. Credit union CEOs' and board members' desire for legislative action is significantly stronger now than a year ago, according to CUNA's annual CEO/board survey. The Bankruptcy Abuse Reform Act, while not perfect legislation, does much to improve upon the status quo and, in so doing, aptly deserves the support it has received from most quarters of the credit union community.
Kris Mecham is CEO of Deseret First CU, Salt Lake City, and chairs CUNA's Governmental Affairs Committee's Consumer Protection Subcommittee.