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A Test of Means .. Or a Mean Test?

The central tenet of S.256 is that increased claims of bankruptcy have enabled abuses, allowing people to escape their debts without paying what they owe. The word "crisis" has been tossed about in much the same way as the debate over Social Security.

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But a closer look reveals that a majority of those who declare bankruptcy in America do so because of real crises -- long-term unemployment, ballooning health care costs and the ruthless tactics of credit-card companies.

A small, but vitally important, part of the 500-page bill is the six-page section dealing with a "means test." The "means test" is the system by which the IRS determines who can legitimately file for bankruptcy, and who cannot. The test is a rigorous process involving examination of the debtor's income and expenses, calculations as to whether or not their expenses meet the standards of their area, and judgments relating to whether or not they genuinely qualify for a Chapter 7 filing.

However, while the process itself is exhaustive, the rationale behind it is less so.

Under S.256, the "means test" would be applied to any debtor filing under Chapter 7, regardless of their circumstances, status, or reasons for declaring. There would be no discretion if a claimant filed due to inability to pay health care costs, or if they maxed out all of their credit cards and wasted their savings on trips to Vegas.

In a manner reminiscent of ChexSystems, the inflexible standard is designed to leave no leeway for debtors to abuse the system, but in the process it is bound to penalize a great many people who have fallen into bad circumstances through no fault of their own.

In addition, according to Sam Gerdano, executive director of the American Bankruptcy Institute, the means test fails to account for dramatic changes in income over the six-month means test period, including loss of a job and obtaining a new one with a much lower salary.

"Averaging your income, however, might disadvantage those who've lost a job during the 6 months", he said in a Washington Post online chat on March 10th. "That they earned a high income previously would skew the result to suggest they have greater repayment capacity. This is one of the shortcomings of the means test."

Other changes proposed by S. 256 include eliminating an automatic stay for evictions, broadening the definition of "nondischargeable" debts (meaning debts that can't be eliminated through Chapter 7 filing) to include certain types of student loans, debts to state and local governments, and monies owed to "governmental units."

There are some stronger consumer protections in place within S.256, such as stronger penalties for abusive creditor practices, but those are contingent on investigations by authorities, and not part and parcel of the law itself. The bill mandates credit counseling and instruction by a "personal financial management instruction course" in order for debtors to fully discharge their debt via bankruptcy.

The legislation mandates that the agencies offering the counseling be nonprofit in nature, such as the Consumer Credit Counseling Service of America (CCCS). But according to Jeffrey Morris, resident scholar at the American Bankruptcy Institute, the amount of time necessary to complete the counseling may take debtors away from work, which would put the struggling debtor even farther behind.

"A possible solution would be online Internet courses, but then you have to face the fact that people in bankruptcy probably don't have regular Web access ... they can't afford to take the time to stand in long lines at the library to get online." Morris believes it will be up to debtors' lawyers to step in and provide the resources necessary to get their clients counseling under S. 256.

Speaking of bankruptcy lawyers, another provision of the bill places the burden of proof for bankruptcy on the debtor's lawyer, requiring the attorney's signature on the petition and verification that they have investigated the claim sufficiently and found it to be solid. Morris believes that while this is a necessary tool to ensure that claims are valid, it will also take much longer, cost lawyers time, thus running up legal bills that debtors may have trouble paying.

"Many lawyers will demand their fees up front, or they will decide the case isn't worth their time," he said. This may lead to clients having to deal with lawyers who aren't as well trained or who are more willing to take the money and run, leaving the debtor even closer to financial ruin and with less time to pull their assets together and try again.

Next: Cui Bono? (Who Profits?)

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