Balance, Equity and the Bankruptcy "Means Test"

  Image courtesy of  zeevveez  (Flickr).

Image courtesy of zeevveez (Flickr).

In eastern philosophies, the “Yin” and “Yang” is a concept used to describe how opposing forces are connected and dependent on each other in the natural world.  

This balanced duality can be seen in light and dark, hot and cold, male and female, etc. 

While opposites, the yin yang concept shows us the inherent stability of all things around us.  In the natural world, opposing forces will balance each other out.  

The concept of balance is central to many eastern philosophies and religions and is key to happiness, healthiness and functionality.

In our modern, western culture, we use the symbol of a scale to define justice. This scale represents the importance we place on balance and equity in our legal system.   

Unfortunately, way back in 2005 the attempt to balance that scale may have caused it to tip too far and topple.

WHEN BANKRUPTCY BECAME UNFAIR

In 2005, Congress passed into law the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).  The ironic name of this new law indicated the intention to create a balance between abuse of the bankruptcy process and protection of consumers.  

It is debatable whether BAPCPA has done anything to prevent “bankruptcy abuse” but I am secure saying that it has done nothing to protect consumers. 

I would argue that BAPCPA hurts consumers by creating obstacles to entry that are sometimes insurmountable.

The demographic of the bankruptcy filer has shifted and I have seen a significant number of people with no viable options in bankruptcy.

There is simply no balance to the means test.  The yin and yang are distorted.

WHEN THE SCALES TIP

I will reference two prior client cases to illustrate the inherent unfairness built into the means test. I draw no judgement as I don’t think morality enters the bankruptcy arena.  

My job is to help my clients get a fresh start, however, their situations help illustrate the unfairness of the means test.

Client 1 is a single gentleman earning just over $110,000 per year.  He owns a house that is in foreclosure with a mortgage that has not been paid for 18 months.  He owns two cars and has two car payments.  He has no children and withholds a significant amount of taxes each pay period.

Client 1 passes the means test and qualifies for chapter 7 bankruptcy.  

Client 2 is a single Mom living with her daughter.  She earns just over $75,000 per year.  She lives in a rental apartment and is current on her rent.  She owns an old car and has no car payment.  She has a significant amount of student loan debt that she is current on.  

Client 2 does not pass the means test and does not qualify for chapter 7 bankruptcy.  

Without further discussing the specifics of each case or getting into the science of the means test, I use this simple example to illustrate the unbalanced nature of the means test.  

Why does client 1 get the benefit of a quick and efficient chapter 7 while client 2 is forced into a burdensome chapter 13 that she can not afford?

Do I tell client 2 to trade in her used car and lease a brand new car which would actually help her qualify for chapter 7?  Why is she punished for her frugality?  Why should she have to incur new debt in order to get rid of old debt that may eat into her fresh start?

Too many interesting questions with some ironic answers.  This irony tilts the scales and creates an unjustified imbalance.  

After seeing so many similar situations, I truly believe that the yin of “consumer protection” needs to be better balanced with the yang of “bankruptcy abuse.”