Too Expensive to File For Bankruptcy

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The online WSJ recently ran a piece on the rising costs of bankruptcy:


Individuals who have filed for bankruptcy protection since Congress overhauled U.S. bankruptcy laws in 2005 have faced a more expensive process as attorneys’ fees have risen by roughly half, according to a government report. In a report issued Monday, the U.S. Government Accountability Office said attorneys’ fees for individuals who file for Chapter 7 bankruptcy-court protection increased by 51% since the Bankruptcy Abuse Prevention and Consumer Protection Act took effect in October 2005. The report attributes the increase to the heavier load of legal work that is necessary to meet the law’s requirements, which experts say has created a significant hurdle for financially strapped individuals.

The average lawyer’s fee for a Chapter 7 bankruptcy case – in which an individual’s assets are liquidated and debts are discharged – climbed to $1,078 in February and March of 2007, compared with $712 for the same period in 2005. For Chapter 13 bankruptcies, which allow individuals to develop creditor-repayment plans, the median attorney’s fee rose to $3,000 in February 2008 from $2,000 just before the law was passed.

“That’s a significant amount of money for the average American family, let alone a family on the verge of bankruptcy,” said University of Illinois law professor Robert Lawless. “It’s very possible to be too poor to be in bankruptcy because you can’t afford the filing. Experts say one factor contributing to the increased costs for individuals is the centerpiece of the 2005 bankruptcy amendments: the means test. Individuals must file extra paperwork to show that, based on their income, they’re eligible to file for Chapter 7 bankruptcy and have their debts discharged.

“It’s very possible to be too poor to be in bankruptcy because you can’t afford the filing.” This is the line that stuck out the most to me. On one hand, the bankruptcy laws give people a chance to restart their financial lives by allowing then to clear their debts. On the other hand, it has also been abused as a “legal” loophole to get out debt obligations entered into. Personally, I think making this process harder more expensive is a good thing as it will make it a less desirable option for most, except those who really need it. The only drawback from all this is that it makes lawyers richer.

It is in times like now where people are just walking away from their homes or waiting for a government bailout, that bankruptcy laws and regulations will come under the most scrutiny. Politically there is pressure to make the laws less rigorous and provide an escape route for a number of indebted people. However, if the laws are made more lax, the American tax payer and enterprises will end up bearing most of the cost in some way or the other.

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