The move comes as millions of working people in the United States are facing an ever-increasing personal debt burden fed by stagnating wages and benefits, the ballooning cost of health insurance, and rising housing and other basic costs of living.
The bill is the largest rewrite of the U.S. bankruptcy laws since 1978. Its passage signifies a victory for the banks and credit card and auto financing companies that drafted the legislation and have been pushing for passage of some version of it over the past decade. The bill won bipartisan support, passing by a 302-126 vote in the House of Representatives and a 74-25 margin in the Senate.
The new law is aimed at preventing many who file personal bankruptcy from making use of Chapter 7 of the bankruptcy code, which allows individuals to forfeit some assets in exchange for wiping out much of their debt based on a decision of a bankruptcy judge. Instead, a means-testing system is being instituted that will force those who are found to earn above the median annual income in their state to file under Chapter 13, which requires a regular repayment schedule to creditors.
For example, a person in this category who is judged able to pay at least $6,000 over five years$100 a monthwould be forced into a Chapter 13 bankruptcy. Further, those who are required to file under Chapter 13 would have to make repayments for five years. Under current law, those payments cease after three years, even if the debt is not fully repaid.
The new law also puts auto finance companies ahead of most other creditors in line for repaymentthe fruit of intense lobbying by General Motors and other auto monopolies. In addition, the new means-testing system will increase the paperwork and along with it the legal expense of preparing a bankruptcy filing, further restricting the accessibility of debt relief for working people.
According to the American Bankruptcy Institute, up to 20 percent of those who file under Chapter 7 bankruptcy each year will be disqualified from doing so under the new law.
Ballooning personal debts
Bankruptcy filings have been soaring in the United States as personal debts from credit card purchases and car loans have mushroomed. Some 1.6 million individuals in the United States filed for bankruptcy in 2003, nearly twice the number a decade earlier.
Debt from credit cards and car loans in the United States stood at a record $2.05 trillion as of last September, and has continued to rise since then. Thats an average of $7,296 per U.S. resident. Between 1999 and 2003, household debt rose from 70 percent of the U.S. gross domestic product to 83 percent. More than 13 percent of household income went toward paying interest and principal on those debts.
In fact, household debt in the United States as a percentage of disposable incomewhich the U.S. government defines as personal income minus taxes, fees, and fineshas risen from 60 percent in 1984 to about 115 percent in 2004.
Some 27 percent of households that earn less than $20,000 in annual income pay 40 percent of it to creditors.Too many people have abused bankruptcy laws, Bush said in a press conference following the signing. Theyve walked away from debts even when the had the ability to repay them.
A study conducted by Harvard University in 2001, however, suggests that most people who file do so because of crushing debt brought on by unforeseen events. Of the 1,771 personal bankruptcy cases studied, about half were the product of rising medical expenses. Nearly 95 percent of those who declare personal bankruptcy are swamped by job loss, family breakup, medical problems or some combination, reported Newsweek columnist Jonathan Alter about this study. About 10 percent have the pleasure of getting cancer and going bankrupt at the same time.
Alter further noted, By the time a debtor has filed for bankruptcy, he or she has often repaid the original credit-card debt plus some interest but still owes thousands in interest on the interest and other fees. The drive by the bosses to cut health benefits has been a key factor in the debt squeeze. The out-of-pocket costs for health care have increased steadily over the past two decades. Between 1995 and 2002 the costs went from an average of $547 per person annually to $744. That doesnt tell the whole story, however, as more and more workers face the prospect of one serious illness or expensive treatment that could wipe out their savings and put them into long-term debt.
Under the new law the wealthiest bankruptcy filers remain shielded from creditors through a variety of devices.
The law does not touch, for example, the so-called millionaires loophole. Five U.S. statesAlaska, Delaware, Nevada, Rhode Island, and Utahallow trust accounts set up in institutions in those states to be exempt from the federal bankruptcy code. People who have the meansread millions of dollarsto set up such a trust dont need to live in the five states, simply set the trust up there.
Thats not even to mention the swath of offshore accounts, or the spendthrift trust that allows the wealthy to create a protected account for their relatives use.
These hidey-holes dont merit so much as a mention in the bill.
Bankruptcy court has never been the terrain of the working class. It has always been designed for those who own capital and the banks they are indebted to. A large section of the codeChapter 11is devoted to the mechanisms through which capitalists can use bankruptcy protection to shield themselves from creditors while they restructure their businesses. This section includes subheadings like Aircraft equipment and vessels; rejection of collective bargaining agreements; Abandonment of railroad line; or payment of insurance benefits to retired employees, which provide mechanisms for the bosses to escape obligations and shield their capital while they reorganize.
In times of economic crisis, bankruptcy serves as an important safety valve for the capitalist class to maintain stability and defend the monopolists. In the recent period, large corporations like U.S. Airways and Horizon Natural Resources, a large coal company, have used the fig leaf of bankruptcy court to tear up union contracts and slash pensions and health benefits. The recent bankruptcy reform does nothing to challenge the prerogatives of these bankruptcy filers.
The debtorship society
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