The consequences of the new bankruptcy legislation have yet to be fully investigated. The law's full scope could have dramatic, far-reaching effects for anyone considering a Chapter 7 or 13 filing, and its provisions don't just affect individual citizens.
For example, small businesses and entrepreneurs will be facing a new set of rules and tests if they wish to file for bankruptcy. A "uniform accounting and reporting standard" will be established to judge claims, and debtors will have 300 days from the initial filing to submit a reorganization plan and additional financial disclosures and reports.
In addition, new proposed sections of the code will strictly define what a small business is and is not, in terms of operating structure, employees, and revenue, as well as setting up regular reporting requirements for the company's financial activity, disbursements, and tax compliance.
Katherine Colgan, a lawyer turned freelance writer and former vice-president of the National Writers' Union, sees S.256 having effects far beyond what its backers foresee ... or, perhaps, intend.
"The bill will have devastating effects on this economy, especially consumers", she says. "By forcing debtors to shoulder bills they cannot possibly pay, it draws them into a maelstrom they can't get out of ... creating an indentured servant class" of people forced to put all of their money towards repaying debts owed to credit companies charging usurious rates."
"What will happen to the creators? The artists, the writers, the dancers, anyone who wants to make a good living doing what they want to do? No one will have the ability to make a fresh start or get a second chance ... if things go wrong, they'll never be cleared of the burden, and society will lose these competent, creative, intelligent people."
Colgan also sees this as an outgrowth of companies' increasing willingness to pare back a salaried workforce and convert them to (or replace them with) contractors, who may receive higher pay at the outset, but give up regular benefits, such as medical and disability insurance.
"Many large companies have simply withdrawn benefits or don't provide them to contractors ... they simply can't get or don't have health insurance," Colgan said. This leaves independent freelancers at the mercy of credit card companies when they face unexpectedly large bills, or to deal with increasingly stringent health insurers when catastrophic medical issues arise. Any of these factors can lead an individual down the path to bankruptcy.
Jeffery Morris concurs that "some things are simply unpreventable" and a large variety of factors leave American citizens "no ability to handle the unexpected." In Morris' view, much of this can be laid at the feet of credit companies with "high usury limits". "It's hard to say no when they're saying 'It's OK'", he stated. "30 years ago, it was a big deal to have even one credit card, but obviously things have changed. Consumer spending accounts for two-thirds of our economyit's a bulwark."
In the short term, Morris sees many "low-end" bankruptcy filings going down, and expensive bankruptcy counseling agencies pricing themselves out of existence. The bill may or may not affect "high-end" filings, such as large corporations or wealthy individuals, in terms of what would constitute a need to file for bankruptcy.
"Over a million people filed for bankruptcy last year, but there's no way to track what happens to them," Professor Warren noted. If this bill becomes law, she said, there will be an explosion of "hard-pressed families taken off the radar ... squeezed out of the system," and forced to join the ranks of the "underground economy" -- dealing solely in cash, moving to other states, assuming different names, etc.
This could lead to unexpected shortfalls of tax revenue, as well as delinquency on child support and alimony payments. Those who are forced under the new law to pay back their debts will be trapped in a "perpetual debt prison".
"This law is pushing people too hard", Warren says. "It's been written with the idea that everyone is hiding sacks of money under their bed when they declare bankruptcy."