Changes In Legislation Caused By Bankruptcy Abuse

You've probably heard about the 2005 bankruptcy reforms but may not realize that bankruptcy abuse drove changes in legislation resulting in making it more difficult for people to file Chapter 7 bankruptcy. Even those people who truly have an unavoidable situation and have not simply caused their bankruptcy through wanton mismanagement of their money have to abide by the new bankruptcy legislation.

Bankruptcy is under the jurisdiction of federal court. It is not filed in state courts nor are the cases heard by judges below the federal level. In October 2005, the laws controlling who can file bankruptcy under Chapter 7, the chapter which allows debts to be discharged without repayment, changed significantly.

The reason for this was bankruptcy abuse. Chapter 7 provided a means of using credit to obtain goods and services and then filing bankruptcy and having many or more of the debts wiped away. This was used even by the wealthy to avoid paying back creditors. This clearly was being used in an unethical manner, and the reform legislation changed the rules about who can file Chapter 7 bankruptcy.

You may be quite surprised to learn that there was sufficient bankruptcy abuse to drive changes in legislation. However, it was a fact that some people would declare bankruptcy, have their many debts wiped away and then repeat the same financial mistakes that lead them into the bankruptcy court in the first place. They would then file another case for bankruptcy and, again, have the vast majority of their debts wiped away.

This bankruptcy abuse was unfair to the American consumer as a whole. Every time someone files bankruptcy, the money lost by producers of goods and services that are unable to recoup the money owed to them must include the lost funds into the overall cost of goods and services provided to the American public. In other words, you pay a small portion of the funds lost by merchants and service providers each and every time you purchase any goods or services. The more money lost by American businesses due to bankruptcy abuse, the money the cost to everyone rises.

Bankruptcy abuse drove changes in legislation that require a person filing Chapter 7 bankruptcy to meet certain requirements proving they are not high income and that they do not have over $100 each month left after paying debts and expenses. Those that do not meet these criteria must repay their debts using a repayment plan filed under Chapter 13 bankruptcy. This should help reduce the cost impact to Americans over time as the businesses that have lost money because of the abuses to the bankruptcy system see the effects of the 2005 legislation.

Next article: Reorganizing Business Debts With Chapter 11 Bankruptcy Law

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